Now read the text and answer the questions that follow.

Inna FROLOVA. ENGLISH LAW for Students of English

Chapter 7.Contract Law

Contract Law

Types of contract

a) Match the types of contract with the explanations below. Write in the spaces provided. Translate the terms into our own language.

1._____________________

a seller transfers the ownership of goods to a buyer for a money consideration called the price; ownership of the goods passes to the buyer when they come into his possession

2._____________________

goods are bought on credit: payment is made by instalments; ownership of the goods passes to the buyer when the contract is signed

3._____________________

the owner permits the hirer to take possession of the goods and use them in return for payment; ownership never passes to the hirer

4._____________________

goods are hired to the customer with an option to purchase; the purchaser takes possession of them as soon as an initial instalment is paid; ownership of the goods does not pass to the buyer until an option to purchase has been exercised, i.e. until the final payment has been made

5.______________________

goods (often machinery, office equipment or company cars) are hired to a business for a minimum period, e.g. 12 months; the lessor usually undertakes to maintain the equipment regularly

6.______________________

in return for a payment (called a premium) by a person or organisation, a company takes on an obligation to make good certain losses or injuries

7.______________________

a financial institution gives a person a loan so that he could buy land or a house; the lender obtains an interest in certain property as security; the interest terminates on payment of the loan

8.______________________

a contract which creates the relationship of employer and employee: the latter provides labour in return for wages

9.______________________

a company provides a product or service to the customer, such as repairing a car or arranging a holiday

Note: the word ‘a service’ collocates with the verbs 'to give, offer, provide, perform, render'.

b) Write sentences contrasting: 1 purchase and credit sale contracts; 2 credit sale and hire purchase contracts; 3 hire and hire purchase contracts; 4 hire and leasing contracts; 5 mortgage and hire purchase contracts, In your answers use the structure: 'A and B are similar in that ... but they are different in that A ... (while B ... )'.

Text 1: Main Elements of a Contract.

Pre-reading tasks

1. What do you think ‘an enforceable contract’ means? What contracts do you think are unenforceable?

2. Before you read the text, look at the following statements and mark what you think the answers are. Then scan the text and check your initial hypotheses.

a. When you board a bus, you make a contract with the bus True / False

company.

b. If you are injured while driving your friend's car, you can True / False

sue his insurance company for compensation.

c. A person who was drunk when he sold his house at half True / False

price cannot get it back.

Now read the text and answer the questions that follow.

Many people think that a contract is only legally enforceable if it is in writing and signed by the parties to the contract. Yet most of us during our daily lives enter into contracts which are neither written nor signed but are perfectly legal transactions recognised by law. When we buy a newspaper or a bus ticket, we enter into an agreement that is governed by the law of contract and can be enforced through the courts. A contract, thus, is an agreement that the law will recognise. In order to be binding in law a contract must contain certain essential elements.

1 Offer. A contract must begin with an offer. It is made by an offeror to an offeree, and if it is accepted by the offeree, a legally binding contract has come into existence, provided certain other requirements are fulfilled. For example, when a seller places an advertisement in a newspaper offering to sell a car and a buyer contacts him offering to buy it, each of them is making an offer in the everyday sense of the word but only one is making a legal offer. English law takes the view (unlike continental law) that it is the buyer who makes a legal offer, and the seller may then decide whether to accept or reject it. Therefore an advertisement to sell something is not normally considered an offer but an 'invitation to treat', i.e. an invitation to make an offer. And thus, goods in shop windows or on display in the shop are merely invitations to treat: a store does not have to sell you goods it displays for sale.

Only offers can be accepted; it is not possible to accept invitations to treat. However, because of the 1893 case of Carlill v. Carbolic Smoke Ball Co., English law does consider some kinds of advertisements as offers. The company advertised that they would pay £100 to anyone who used their medicine and still got flu. Mrs Carlill did this but still caught flu, so she asked for the money. The company refused to pay arguing that their advertisement was not an offer but an invitation to treat. However, the court held that when Mrs Carlill saw the advertisement and bought the medicine, she was accepting a specific offer made to her, and so the company was obliged to pay. This case also illustrates that offers can be made not only to a specific person or group of persons (for example, employees) but to the whole world. If an offer has been accepted, it cannot be withdrawn without the agreement of the other side.

2 Acceptance. The acceptance must mirror the offer exactly (this is called the 'mirror image' rule). There must be no 'ifs' or 'buts'; if you say 'yes, but. .. , and name some condition, this would not be an unconditional acceptance and therefore not an acceptance at all. In fact, it would be treated by the court as a counter-offer, and a rejection of the first offer. An old case Hyde v. Wrench (1840) illustrates the point. A farm was offered at £1000. The offeree thought the price was too high and offered £950, but this was refused. Anxious to obtain the farm, he communicated acceptance of the original price but the farm was sold to another buyer. The court held that the offer of £950 was a counter-offer and was the same as a rejection.

Acceptance must be communicated to the offeror, either by word of mouth or in writing, or it may be inferred from the offeree's conduct: for example, if he receives goods on approval and starts making use of them. Mental acceptance or mere silence is not sufficient. With an instantaneous form of communication, such as fax or email, the general rule is that acceptance takes place when the message is received. With postal communication the rule is the direct opposite: the contract is concluded when the letter of acceptance is posted, provided it is correctly stamped and addressed.

An offer is capable of acceptance only by a person who knows of its existence: for example, a person giving information cannot claim a reward if he did not know of its existence.

3 Consideration. A legally binding agreement must be supported by consideration. It is something of value which exchanges between the parties as a result of the agreement. For example, if a company sells a laser printer for £900, it is supplying consideration in the form of a laser printer and the buyer is supplying consideration in the form of £900. A promise not to sue someone, in return for some act on the wrongdoer's side, is a common form of consideration. Without consideration an agreement is not binding - it is a naked agreement (a nudum pactum).

Consideration must have some economic value; natural love and affection or a moral duty is not enough to render a promise enforceable. However, although consideration must be sufficient, it need not be adequate. If a person agrees to sell his £50,000 house for £5,000, the buyer is giving sufficient consideration despite its manifest inadequacy. This is so because the principle of the freedom of contract requires that it is for the parties themselves, not the courts, to determine what constitutes a good bargain.

Consideration must work in both directions. A promise of a gift cannot be enforced because a gift is one-way consideration. (Only if it is made in the form of a deed - a document signed, sealed and delivered - can such an agreement be legally binding. A deed allows consideration to be one-way and is enforceable in the courts.) Each of the parties has to lose something and gain something else.

Another rule is that consideration must never be in the past; promises for services rendered in the past are not legally binding. If someone promises to thank a person for some service he rendered and then changes his mind, that person cannot enforce the promise on two grounds: first, because the promise is merely one-way and therefore a gift and, second, because his consideration is in the past. In commercial dealings, however, where work is done first and payment is made afterwards, the rule about past consideration does not apply, because the promise to pay is implied in law.

If someone promises to do something which he ought to have done anyway, for example, to improve his attitude to work, he is promising to fulfil an existing obligation, and that in law is not consideration, and therefore he cannot sue if he does not receive the promised benefit. For this reason, new promises made by one party after the entry into the contract are not binding if they are not matched by the other party's fresh consideration.

At common law, only the person providing the consideration could sue on a contract, in other words, only parties to a contract could sue on it. The most notable exception to this rule was in motor insurance cases: an injured person can sue the motorist's insurance company even though the person was not a party to the insurance contract. As a result of the enactment of the Contracts (Rights of Third Parties) Act 1999 the rights of third parties have been substantially widened. Now a third party has a right to enforce a term of the contract where the contract expressly provides that he mayor where the contract was entered into for his benefit.

4 Capacity. To be legally entitled to contract, a person must have full legal capacity. It is attained at the age of 18 by persons of sound mind. Capacity also includes appropriate status for making contracts: for example, some contracts can only be signed by the directors of a company.

A person who has not reached the age of majority is known as a minor. Minors do not have full contractual capacity, so most agreements cannot be enforced against them. However, if a minor makes a contract for necessaries - things which a minor needs, like clothes - it is valid. Any contract of employment or training that is advantageous to the minor is also a valid contract. If, for example, a young person signs an apprenticeship agreement which stipulates that he must remain with the company for two years but he decides to leave after a year, the company may sue him for damages for the money they have spent on his training (although in practice this is rarely done). Other contracts relating to minors are not valid - they can be void or voidable. A void contract is one that has no legal force from the moment of its making. Any agreement to supply goods which are not necessaries to a minor is void. Similarly, credit and hire-purchase agreements with minors are void, but the courts have a discretion, under the Minors Contracts Act 1987, to order a young person to return property or goods acquired in this way. A voidable contract is one that is valid when made but may be later set aside (cancelled) by an order of a court. Agreements with minors to lease a flat or house, to buy company shares or to enter partnerships are voidable. A young person may avoid the contract (cannot be bound by it) before he comes of age, but at 18, if he fails to formally repudiate (cancel) the contract, he becomes fully bound. This is not possible with void contracts.

Contracts with mentally disordered and drunk persons are voidable. Such a person may avoid the agreement provided he can prove a) that he was drunk or insane at the time he made the agreement and b) that the other party realised the fact. However, a person is not to be treated as lacking capacity merely because of his old age or a condition of his or because he makes an unwise decision. At common law, where the incapacity is not known to the other party, the contract cannot be set aside, unless the bargain is so unconscionable that it can be contested in the law of equity. And only in certain specific cases is the contractual capacity of persons suffering from a mental illness completely removed by statute and their property made subject to the control of the court.

5 Legal intent.This is the intention of the parties that their agreement should have legal consequences. Indeed, there would be no contract if, for example, they were merely joking when they made the agreement. This is supported by a case decided in 1605 (Weeks v. Tybalt) when a man joked that he would pay money to any man who would marry his daughter. In establishing legal intent the courts examine what the parties actually said and did (an objective test) rather than what they intended to say or do (a subjective test), because otherwise people who appear to have agreed to certain terms may try to escape liability by claiming that they had no 'real' intention to agree to them.

In business agreements which contain all the essential elements, legal intent is presumed by law. If, however, one party states that the agreement is 'binding in honour only', then the legal intent has been specifically removed, and the agreement becomes void. In domestic and social arrangements the presumption is the opposite: the court will presume the absence of legal intent. For example, if a father promises his son £5 a week for walking the dog and then refuses to pay, even though the son has fulfilled his side of the agreement, there will be no breach of contract since no contract exists because of the absence of legal intent. However, domestic agreements between spouses who are separated or are in business together are enforceable. Gaming and wagering contracts used to be null and void because the law presumed the absence of legal intent; parties could not sue on the contract nor recover money or property transferred. Since the passing of the Gambling Act 2005 such contracts can be enforced.

6 Certainty of terms. The terms to which the parties are agreeing must be certain, they should not be unduly vague or incomplete. A typical situation will be when one party withdraws from an agreement before the terms have been finalised, and the other party sues them for breach of contract. The court may well agree with the first party that there was no contract because the terms are too vague or have not been finalised. This happened, for example, in Loftus v. Roberts (1902) where an actress was engaged to perform in a West End play with the salary 'to be mutually arranged between us'.

7 No vitiating factors. Vitiating factors make a contract invalid. They can make it either void (and then neither party can enforce the agreement) or voidable (then it is up to an innocent party whether or not to end the contract). The factors that the law recognises as undermining a contract are illegality, mistake, misrepresentation, duress and undue influence.

All illegal contracts are unenforceable. These include agreements: a) to commit a crime, b) to defraud the Inland Revenue, c) involving public safety (e.g. contracts with persons living in enemy territory), d) involving sexual immorality (e.g. a contract with a prostitute for sexual services is not illegal, but it would be unenforceable in court because it is immoral), e) tending to the corruption of public life (e.g. bribery); e) prejudicial to the administration of justice; f) prejudicial to friendly foreign countries.

Special rules exist for interpreting contracts in which one contractor made a mistake or was tricked or pressured into making an agreement. If one party knows that the other party made a mistake as to the terms of the offer and fails to bring it to his notice, he will not be able to enforce the contract according to his version of its terms. If one party had misrepresented the facts to the other, there would be 'no meeting of the minds' between the parties (no consensus ad idem, to use an old-fashioned term), and the court would not normally uphold this agreement. Equally voidable are contracts entered into under duress. Duress can take the form of a physical threat to the person or an economic one, where a threat is made to break an existing contract or to commit a tort and the injured party has no practical alternative to agreeing to the terms proposed by the person making the threat. Undue influence is an equitable doctrine which arose independently of common-law duress. Undue influence is presumed in certain relationships, for example, between doctor and patient, solicitor and client, parent and child, where the weaker party might fall under too much influence of the stronger party so that it prevents him from exercising an independent judgment. If a client then decides to sue the professional for loss caused by wrong advice, the latter may rebut the presumption by presenting evidence that the client had access to independent advice.

8 Form. In the majority of cases the law is not concerned with the form in which the contract is made. However, some contracts under English law must always be in writing in order to be legally binding, for example, sale of land contracts, leases of three years or more, insurance contracts, loan and hire purchase agreements, agreements to buy company shares, etc.

Date: 2016-03-03; view: 825