A contract is a civil obligation that is voluntarily created between entities concerned and as the rule of law exists, this obligation is upheld

A contract is a civil obligation that is voluntarily created between entities concerned and as the rule of law exists, this obligation is upheld-Discuss

A contract is an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit also known as a consideration[1]. This is the definition of a contract. A contract is the agreement between two or more parties and it is present at the heart of most business dealings. It is one of the most significant aspects of a legal proceeding and it can involve various circumstances and complexities. Oral or written, a contract is bilateral in nature which in lay terms means that “a promise is exchanged for a promise”. It is in other words an obligation that involves a common interest between the involved parties. The mentioned interest is profit; monetary or non-monetary.

To make a legally acceptable contract an offer must be presented which the intended receiver must accept. In general, offer and acceptance are essential to make a contract. However, it is not as easy to define a contract.

An offer must be made that is clear and precise and cannot be vague. It is a definite promise to be bound on specific terms. For instance, in the case Fisker v. Bell[3] the shopkeeper was prosecuted for displaying a flick knife in the shop window. The court decided in the end that displaying the article was merely “an invitation to treat”’ it was in no means an “offer to sell”. The offer must be clear. The mens rea for sale must be definitive or else a contract is not established. Likewise, acceptances are also subject to various legal understandings. Apart from express words, acceptance can also be implied. If however the offeree proposes new terms, it is a rejection to the offer and is classified as a counteroffer.

There is also an acceptance which is “subject to contract”. This means that the offeree is agreeing to the terms of the offer but proposes that the involved parties should negotiate a formal contract on the basis of the offer[4]. We have so far discussed in brief, the terms or foundation in which a contract is established. By agreeing to the terms and conditions mentioned in a contract the involved parties are obliged to uphold the contract.

A civil obligation is a legal agreement stipulating a specific payment or action, especially if the agreement also specifies a penalty for failure to comply. Sometimes a contract does not state/specify a penalty for failure to comply with it. Under such circumstances, a party might plead to the court for a number of remedies in the event of a breach of contract. A court would under normal circumstances remedy such a situation by forcing the defendant to paying compensation for damages or award a quantum meruit to the defendant. “Action for price” means that the defendant breached the contract by failing to pay. The above two are common law remedies. There is also a specific performance, injunction and rescission. The payment for the value of what the defendant has committed is known as quantum meruit. A court order to the defendant to perform the contract is called specific performance. A court order for the other party to observe negative restrictions is called injunction. A cancellation of the contract is called rescission. These are the remedies a court might have to refer to when the need arises. However, they are not meant to be a punishment, which is a criminal and not a civil measure[5].

We have discussed what a plaintiff could expect if a contract is breached. However, we have not discussed when the contract is legally acceptable. An agreement is not a binding contract unless the parties intend to create a legal relation. Under normal circumstances a court usually presumes that:

a. Social, domestic and family arrangements are not usually intended to be binding.

b. Commercial agreements are usually intended by the parties involved to be legally binding.

Once it is defined that the contract is legally binding it becomes a civil obligation that both parties have to uphold. Justinian is the first to define obligation in his Institutions, book 3, section 13 as “a legal bond, with which we are bound by necessity of performing some act according to the laws of our state”[6]. As defined by Justinian a contract becomes an obligation because regulations exist for upholding the contract.

We have discussed how contracts are legally binding obligations and prior to this we have discussed what remedies exist if a contract is breached. Now we discuss how a contract comes to an end. In other words, how a contract is discharged.

Contracts are discharged in one of four ways. The four ways are by performance, agreement, breach and frustration. When a party fulfills or performs his contractual agreement, the contract is ended. Partial performance or incorrect performance does not suffice. Most contracts discharged by performance involve the payment of money. A contract may also include provision for its discharge by including/imposing a condition. Either the contract may not end until the condition is met, nor would the contract end unless the condition is met. This is discharge on the basis of agreement. A contract could also end if there is a fundamental breach of the contract. Fairly simple to understand, however; discharge of a contract due to frustration or impossibility of performing the contract is rather complicated. If it is impossible to perform the contract when it is made, the agreement is regarded to be void; the origination of the doctrine of frustration was after the case Taylor v Caldwell[7] wherein the contract was deemed impossible to perform and discharged the contract.

We have discussed in brief how contracts are formed, how these civil obligations are enforced and finally how contracts are discharged. Now this essay will delve into how a contract is deemed illegal.

Sometimes a contract cannot be enforced in a court of law because they are illegal to begin with. Illegality can be assumed under the following circumstances. A contract is void by statue or a contract is void at common law on the grounds of public policy or it is illegal, void and prohibited by statue or finally it is illegal and void at common law as contrary to public morals or the interests of the state. If a contract is deemed illegal no parties have the right to enforce the contract on one another. Generally, if a contract is illegal, transfer of money or property from one party to another cannot be recovered. However, there are exceptions to this. Restraints on trade are also a void clause in a contract. Any restriction on a person’s normal freedom to carry on a trade, business or profession in such a way and with such persons as he chooses is a restraint of trade[8]. Many other commerce related statues exist that prevent restraint in one form or the other.

We will now present an illustrated example of a contract.

Mr. A and Mr. B are two individuals sharing a common interest; money. They decide to do business together and draw up an agreement after formulating the Association of Articles. The terms have been agreed to and the contract has been signed, the terms of the contract are as follows.

1. In return for services offered Mr. A is paid an amount of BDT 6, 00,000 annually.

2. As manager of the business Mr. A also receives additional benefits of paid house rent and life insurance coverage. The highest as deemed by the Article of Association.

3. All decision for the business is made by voting for or against the aforementioned decision. Only Mr. A and Mr. B have voting rights.

4. Mr. B receives all profits generated by the business after deducting taxes. The payment is made annually.

The first term is called the offer to Mr. A and after the contract is signed it becomes an obligation of the business to pay Mr. A’s due right per year. Here, this term is an express term. Ambiguity is avoided and is of sound principal.

Next, we take an example wherein Mr. A demands that he receive yearly paid vacation leaves. This cannot be a counter offer as the complication is with a clause in the Article of Association and not the contract. We presume Mr. A pleads in a court of law that he be allowed to have paid vacations. Irrespective of how the court rules in the end, the business is not obliged or bound by contract laws to provide the vacation asked for. This is an example of frustration to perform. As long as the Article of Association is not amended, this cannot be rewarded by Mr. B or the business. Mr. A might seem to be restricted to this particular term of the contract. The contract might not be classified as illegal as it is an article in the Article of Association that has caused the complication. This is the principle of the “avoidance of restraint on trade”. Mr. A is in his legal right to take a vacation. However, the business not Mr. B is obligated to pay for it.

We next assume that Mr. B is against Mr. A’s request and a decision also cannot be reached as it is a tie in the voting process as Mr. B would veto the term. Neither Mr. B nor the business is obligated to allow Mr. A’s request as they have not breached any terms of the contract. In the event that a decision cannot be reached a court could be approached or the business could be dissolved. Contract laws are voluntarily created civil obligations as the parties involved draw up the terms and conditions themselves while adhering to the principle of free consent. In contract laws and perhaps the purpose of this essay the single most defining principle could be the law of free consent. The terms are created without duress and after an agreement is reached the parties could be forced by the law to uphold their end of the bargain.

Finally, it has been decided that all profits generated by the business after tax deductions would belong to Mr. B for his personal use. Although the business would require funds for expanding or running for the foreseeable future, according to the contract, the business is bound to pay Mr. B his due. This term has been voluntarily decided by both Mr. A and Mr. B without external influences or undue duress. Hence Mr. is obliged/required to pay Mr. B the profits. However due to lack of necessary funds if the business fails to run profitably / risks bankruptcy, the business itself as a separate entity could sue Mr. B and plea a court to force him to accept amending the contract. Although Mr. A (the manager) and Mr. B (the owner) agreed to the contract this particular clause causes the contract to be deemed fundamentally flawed as the business itself is not a growing concern.

The purpose of this example has been to parlay the complexities of contract laws and the various remedies offered by the legal system. The above scenario, for the purpose of the assigned topic, tries to illustrate the primary principles of contract laws. Namely, offer, acceptance and free consent.

We have so far discussed in brief about contracts. A contract being bilateral in nature is an agreement between two and more parties in which exchanges are recorded. These exchanges or promises are done voluntarily by the interested parties. After the promises have been recorded and registered in a court they become obligations bound by law (as much as it can legally be enforced), to be upheld by the involved parties; the offeror and the offeree. Remedies exist in the instance that a breach of contract has been established and when brought in front of a judge the contract is scrutinized or examined and then decided upon as to how much it can be enforced. Hence, a contract is a civil obligation that is voluntarily created between entities concerned and as the rule of law exists, this obligation (in the form of a contract) is upheld.

Bibliography

· Business Law – Cima (1992). PPP Publishing

· http://legal-dictionary.thefreedictionary.com

· http://www.wikipedia.org

[1] Farlex, “contract”, available at http://legal-dictionary.thefreedictionary.com accessed on 16 February 2013

[2] Gibson v Manchester City Council [1979] UKHL 6

[3] Fisher v Bell [1961] 1 QB 394

[4] ‘Offer and acceptance’, Business Law – Cima. (1992). PPP publishing.

[5] Ibid p149

[6] Albanese, Bernardo. “Papimano e la definizione di obligatio in J, 3, 13, pr.” (1984) 50 SDHI 166 sqq.

[7] Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309; [1863] EWHC QB J1

[8] ‘Illegality of contracts’, Business Law – Cima (1992) PPP publishing.

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