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Law Of Contract

Musbri MohamedDIL; ADIL ( ITM )Pursuing MBL ( UKM )

Prepared by :-

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Law of Contract

What is a contract?How to create a valid contractOffer and AcceptanceTerms of a contractVitiating factorsDischarge 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 agreementthat 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; andIntention 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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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.

Simple Example

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Identifying Offers

Some types of statement are not offers:

Statement of intention;Supply of information; andInvitation 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; and4. A share prospectus.

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Who is the offeree?

An offer can be made to :-A particular person;A group of people; andThe 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 ; andLegality.

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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; andInnominate 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;

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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 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.

Exclusion Clauses

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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 signature2.By notice3.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 offerAn acceptanceConsiderationCapacity to contractIntention 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; andPublic 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; and3.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; andStatements 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 trueThis is closer to a statement of fact.

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Types of Misrepresentation

There are 3 types of misrepresentation:-

1.Fraudulent misrepresentation2.Negligent misrepresentation3.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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A contract can be discharged in 4 ways:-

1. Performance2. Agreement3. Frustration4. Breach

Discharge of Contracts

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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.