The Law of Contract

Introduction

The Law of Contract is a law governing the enforcement of promises. Since courts cannot enforce all laws, they look out for certain elements whose presence indicates that the agreement under scrutiny is indeed a contract. The term contract means that the parties involved are in liabilities regarding each other. Ideally, the process of making a contract begins with an offer which must then be unconditionally accepted. The communication of the offers and terms of acceptance are issues that are guided by requirements imposed by the law. If the elements of a contract are found to be missing by a court of law, then the contract is voidable. Historically contracts were a means of managing and regulating dyadic exchanges. The origins of contracts had their roots in areas such as marriages, debt collection, surgical accidents and related transactions. According to Edelman & Suchman (1997) a notable case in the earlier applications of a contract is evidenced in the story of Humber Ferryman.

As the name suggests, this incident involves a ferryman who was paid to ferry a plaintiffs horse across the sea. Unfortunately, the ferryman made some miscalculations, and the horse drowned. The doctrinal contractual landscape of the 16th century called for consideration. The Solicitor General would later on in the Golding’s case remark that ”in every action upon the case upon a promise there were three things worth contemplating: consideration, promise and breach of promise. As a result of the principles of free market exchange, contracts also evolved due to the proliferation of parallel democratic ideals. Other suggestions advanced are that the reason behind the modern formalization of contracts as state-backed and legal instruments could be attributed to capitalism and the liberal state (Macaulay 1985).

Nature of a Contract

To be legally enforceable a good contract should fulfil all of the following conditions:

  • Offer and acceptance.
  • Intention to create legal relations.
  • The certainty of terms.
  • Consideration.
  • Legality of purpose.
  • The capacity of the parties.

Offer and Acceptance

For a contract to be considered as existent, an offer has to have been made by one party, and it has to have been accepted by another. An offer is defined as a tentative promise made by the offeror (first party) subject to acceptance by another part (the referee). Once the judge accepts the offer by averring to the condition or request, it becomes known as the contract. Upon acceding to the contract, the offer (promise) is no longer deemed as tentative rather an offeror is bound to fulfil their promise and their referee is obliged to fulfil their conditions as well. The formation of a contract by offer and acceptance renders the parties as bound to its terms.

Intention to Create Legal Relations

Contractual agreements must be enforceable, and they must have been conceived with the intention to pursue legal options in case their terms and conditions are breached. The enforceability of a contract, however, depends on the context within which it was signed. Most business contracts do intend for legal consequences if breached, but political circumstances make use of memoranda of understanding in most incidences.

Certainty of terms

The drawing up of a contact depends on consensus as to thee the terms of the proposed contract. All parties involved must have a clear understanding of their rights and duties in the transaction for the enabling of a consensus.

Consideration

Contracts are premised on the concepts of bargains which entail the making of a contribution and paying a price for the promise obtained from the other party.

Legality of Purpose

Contracts must operate within the bounds of legalities. They should not contain content that defies public good neither should they contain material that violates the law.

Capacity of the Parties

Individuals involved in contracts must possess some form of contractual authority otherwise the purpose of the contract is defeated rendering it invalid. The law always presumes that parties involved had the legal capacity to become signatories to a contract.

 

Vitiating Elements In The Formulation of a Contract

Key among factors that compromise the legality of contracts include misrepresentations, mistakes, unfairness, duress and undue influence.

Misrepresentation

A misrepresentation occurs when a false statement of fact is used to induce/entice a party into a contract and achieves the intended effect.

Types of misrepresentation

Fraudulent – This occurs when a false representation is deliberately made.

Negligent – This occurs when a representative charged with the duty of ensuring that representation is fair and accurate fails to do inducing loss and damage due to the falsity of the representation.

Innocent – This is a residual category for misrepresentations that can neither be deemed negligent nor fraudulent.

In the case that involved John McGrath Motors v Applebee (1964), Applebee sued John Mcgrath motors for what he termed as fraudulent misrepresentation on what he had been told was a new car. However, the car was not new as it had been driven to the rural showroom from the manufacturer’s warehouse. Therefore, in Applebee’s understanding the car was not new and the company had misrepresented.

Verdict: The car was not new because it had been used and in making the statement that the car was new despite the information they were privy to, the car dealers were fraudulent.

Appeal Verdict: The statement ‘the car is new’ is not fraudulent as it was made without indifference towards its falsity. ”Because John McGrath Motors held an honest belief in the statement on the newness of the car the statement is not fraudulent”.

 

Duress

Duress is defined as the wrongful pressure exerted on a person to coerce that person into a contract that he or she would not have entered if the undue pressure hadn’t been applied. In most instances, duress entails the use of some form of force to pre-empt entry into the contract. This coercion could manifest itself in physical, emotional or mental form but it has to be applied to a degree in which it deprives the coerced party of the freedom of will since its ultimate was to leave them with no alternatives except entering into the contract. There are some types of duress such as contract made through exposure to physical force. This is one of the most serious forms of duress.

Other types of duress include: Physical harm to other people such as the loved ones of the victim or their property, threats to disgrace the victims’ family members and threats of economic loss to the person.

Undue Influence

Undue influence is sometimes used in the place of duress, but they are different. It entails taking advantage of another person’s trust during the formation process of a contract.

In most cases in which undue influence takes place, there is always a relationship between two people involved, and one party often exerts superiority over the other. However, unlike duress, it does not typically involve the issuance of a direct threat. Instead, it entails the exertion of excessive pressure but the party in the superior position over the party in a more inferior position.

Unfairness

Unfairness in the law of contract manifests itself in the form of exclusion clauses deliberately involved in a contract with the aim of making one party escape liability about the contract. Unfairness also occurs in the form of penalty clauses which allot a disproportionate amount of money when viewed in light of the damage caused/suffered. In litigation involving unfair terms the parameters used to judge are whether the unfair term was brought to the attention of the parties during the making of the contract. If the term had not been illuminated during the signing of the contract, then the parties involved cannot be deemed to have accepted the term.

Mistake

A mistake, in contract law, is an erroneous belief occurring at the time of contracting that sees certain terms believed to be true. A mistake can be argued as a defence and if argued successfully can render a contract void or voidable ab initio.

There are three types of mistakes in contracts:

Mutual Mistake

Mutual mistakes occur when the parties to a contractual agreement are both/all mistaken about the subject matter of the contract. The parties in such a cause are in some respects in sync, but they are mistaken. Such a contract is thus rendered voidable. However, a collateral mistake which is not tied to the heart of the contract does not offer provisions for the rescinding of a contract. The material emphasis during the formation of contracts can reduce the occurrence of mutual mistakes.

Common Mistake

A common mistake is where both parties hold the same mistaken belief of the facts as was evidenced by the House of Lords v Bell v Brothers Ltd and The Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd.

The Purposes of Contract Law

In determining the purposes of contract law, Gerald Friedman posited that lawyers and philosophers may have different purposes in examining contract law. In the case of philosophers, their primary concern is the language used by lawyers and whether these contracts meet ethical thresholds. On the other hand, lawyers are more concerned with determining whether the thresholds of legally binding arrangements had been made.

The three distinct functions of the theory of contract are the prediction, explanation, and justification.

Prediction

According to Friedman, lawyers ascribe more to the predictive function of the theory of contract by trying to assess whether legal arrangements had been made and to ascertain what courts would do if they were faced with certain scenarios. Lawyers, however, go beyond the role of prediction and try to make persuasive arguments in a bid to induce a favourable outcome from the courts. The desirable outcome is then best achieved by presenting arguments to the courts in the terminology that courts prefer.

Explanation

Explanations occur on two different levels the first involves increasing the understanding of how court decisions fit together and the manner in which law develops.

The second explanation involves understanding the role of contract and contract law in the society. Explanations in the first category are likely to adhere to the principles expected of courts the second category explanations are less likely to do so. These latter explanations are often influenced by social and historical perspectives. The explanations are likely to have a leaning towards social sciences and are more likely to be influenced by causes rather than reasons.

Justification

The third function of contract theory is associated with the justification of the decisions, principles and doctrines of contracts. Justification differs from the explanation in the sense that it advocates for the reform of laws which it feels are not correct. A great number of theorists are of the view that contracts must be justified and that theories that suggest that contract theory is unjustified are misinformed. In this context, one can draw parallels between justification and ethical theory because the latter is premised on the formulation of theories that systemize and account for long held beliefs.

How Contract Laws Impact the Running of Businesses

Contracts are synonymous with the running of businesses which by nature demand the entry into contractual obligations. Businesses can run afoul of the customer to whom they by default have a contractual obligation, for instance if goods are paid for and not delivered this a breach of contract. In institutions such as schools, it was previously rare and almost unheard of for teachers to be held legally and negligently liable for poor teaching methods. An emergent trade nowadays, however, is that teachers are being sued for contractual breaches directly related to their teaching methods. The first case of educational negligence was against Peter W. v San Francisco School District. In this particular case, the student sued the school for failing to provide adequate instruction or basic skills related to reading and writing. The court ruled categorically that there was no absolute or general duty of care owed to students by teachers on educational outcomes.

How Contracts Impact Individuals

Employment Contracts

Most individuals in employment are directly affected by contracts. Whether they are in casual or permanent employment, legislation in many countries has been altered to ensure flexible contracts offer the same treatment as that afforded to permanent employees. According to Macaulay (1985), contracts to shift the risk from the employing organization to the individual. This essential means that being employed on a contract leaves the employee in a position of disadvantage and marginalization. The shift in the desire to that of flexibility reflects a change in employment decisions by workers.

According to (Wilkinson-Ryan & Baron 2009) the subjects of research that accounted for the extent to which individuals accounted for morality in evaluating the actions of a party breaching a contract. The research findings appeared to suggest that the breach of a contractual promise was a punishable moral harm. Results from the use of vignette studies also revealed that morality had a part in the defaulting of mortgages by individuals.

Form adhesive Contracts

These types of contracts have been named as the modern result of the evolution of contracts and have coincidentally emerged alongside the rise of the modern corporation (Edelman & Suchman 1997).  Form adhesive contracts are often drafted on a take it or leave it basis; they are the main means used to regulate exchanges between individuals and corporations. Empirical research has made significant inroads in investigating the extent to which form adhesive contracts are a tool used by companies to exploit individuals. These contracts have been shown to be aimed at replicating authority advantages that organizations hold over people. One of the types of form adhesive contracts in use today is the End User License Agreements (EULAs). Though this term was found not to be unusually exploitative, individuals tend not to read them, and this could leave them vulnerable to veiled extremities

(Marotta‐Wurgler, 2008).

Limitations of the Law of Contract

Courts are not able to enforce contracts without a theory of interpretation that distinguishes between the semantic content of the parties way to writing to the legalistic implications of the writings. This has led to the advancement of the school of thought that textual interpretation should be the mode should form the theoretical perspectives for category one contracts. Contracts also have too many rules regarding the contractual relationship than are necessary for enforcement and interpretation functions. The rules often occur in the form of defaults forming control measures when parties fail to contract within their bounds. The core function of the law of contracts is the creation of good defaults. The notion that contract law should restrict itself to encouraging investment and promoting efficient trade has received the objection.

This has been influenced by some things mainly:

The fact that most companies bent on the maximization of profits do harmful and unethical things such as pollution, labor malpractices through offering poor working conditions and low wages and, therefore, the argument advanced here, is that the law should intervene. Another argument advanced is that firms barely even make profits owing to the judgemental and cognitive errors of its workforce and firms would, therefore, be incapable of making profits even if they tried. The responsibility of the state in promoting fairness concerning contracting and that it can assume the distributive role although this may sometimes impede efficiency. Many of the rules regulating contracts should not be mandatory. These rules remain a prominent feature of contracts as a result of paternalism. These rules do not override contractual terms but rather are aimed to override terms that appear to conflict the intentions of parties involved.

Efficiency Theory

The need for an efficiency theory to guide contracts of today is salient. The formulation of contract law has become a prioritized area in most places today. An efficiency theory can, however, pose serious disadvantages especially if it is limited to contracts between firms. One of the reasons for this is that contracts would still be entered into even if there was no legal permit for breach. Contracts would therefore easily be rendered self-enforcing when parties realize that the benefits they seek to gain from the breach are lower.

Conclusion

The area of contact theory is gaining significant traction especially in the field of microeconomics and industrial organization economics. The field of contract theory is barely 30 years old but has already produced three Nobel Peace Prize winners namely: Michael Spence, George Akerloff, and John Stiglitz. The major disadvantage is that much of the empirical work in this field assumes a mathematical form and may therefore not appeal to nonspecialists. It is instructive that the current area of contract law scholarship identifies a satisfactory theory of contract which is one thing which it sorely lacks. About thirty years ago the Classic Willistonian Model described by Grant Gilmore offered a framework for contractual relationships and was often exchanged between contracting parties. The Willistonian Model was steeped in notions that adhered to the centrality of written arguments that were voluntarily exchanged between contracting parties and it addressed the limited role of the law in interpreting such written arguments. Gilmore, however, attributed this model to influence from Holmes thinking than to the actual study of law. As mentioned earlier, it is imperative that law scholarship comes up with a model or theory of contact. The current theories have been described as being Willistonian in spirit, but yet they apply in a very limited domain. The law of contract is here to stay and has permeated economic, social and political spheres. Therefore, the lacunas in contract law need to be addressed with urgency and finality.

 

References

Edelman, L.M & Suchman M,C, (1997) The Legal Environment of Organizations Annual

Review of Sociology, 97, 1531-1576.

Macaulay, S. (1985). Empirical View of Contract, An. Wis. L. Rev., 465.

Marotta‐Wurgler, F. (2008). Competition and the Quality of Standard Form Contracts: The

Case of Software License Agreements. Journal of Empirical Legal Studies5(3), 447-

475.

Wilkinson‐Ryan, T., & Baron, J. (2009). Moral judgment and moral heuristics in breach of

contract. Journal of Empirical Legal Studies6(2), 405-423.

Cases

McGrath Motors v Applebee (1964),

Peter W. v San Francisco School District

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