A contract is an agreement, enforceable by law where every promise and every set of promises, forming the consideration for each other, is an agreement. The law of contract is most important part of commercial law because every commercial transaction starts from an agreement between two or more persons. The objectives of law of contract are to introduce definiteness in commercial and other transactions.
According to Salmond1 “a contract is an agreement creating and defining obligations between the parties”. According to Sir William Anson2, “A contract is-an agreement enforceable at law made between two or more persons, by whom rights are acquired by one or more to acts or forbearances on the part of the other or others”. A contract intends to formalize an agreement between two or more parties, in relation to a particular subject. Contracts can cover an extremely broad range of matters, including the sale of goods or real property, the terms of employment or of an independent contractor relationship, the settlement of a dispute, and ownership of intellectual property developed as part of a work for hire. In a contract there must be an agreement and the agreement must be enforceable by law.
Freedom of Contract and Sanctity of Contract are the dominant ideologies. Parties should be as free as possible to make agreements on their own terms without the interference of the Courts or Parliament and their Agreements should be respected, upheld and enforced by the courts. Contracts are an important part of business life. Businessmen establish agreements between clients, landlords or tenants, suppliers, customers and with other businesses. They are usually drawn up by solicitors and can be full of legal jargon.
2. Definition of Freedom of Contracts :
Freedom of contract is the freedom of individuals and corporations to form contracts without government restrictions. This is opposed to government restrictions such as minimum wage, competition law, or price fixing etc .
Right of an adult to make a legally binding mutual agreement with one or more other persons, without governmental interference as to what type of obligations he or she can take upon himself or herself. A power of freely contracting and freely determining the provisions of contracts without arbitrary or unreasonable legal restrictions guaranteed as a natural right by U.S. federal and state constitutions —called also liberty of contract
This doctrine promotes the idea that, since parties are the best judge of their own interest, they should be allowed to make the bargain that suits them without interference from the courts.
3. History related to freedom of contract in America :
The contract clause, found in Article I, section 10 of the Constitution, prohibits the states from impairing the obligations of contracts. This clause had the potential to be the foundation of a general right to freedom of contract, but the Supreme Court held in Ogden v. Saunders, 25 U.S. 213 (1827), that the clause applies only to retroactive impairments of existing contracts, not to general police power regulation that affects future contracts. Starting in the New Deal period, the Supreme Court further restricted the scope of the clause, and today it is rarely invoked to limit states’ interference with contracts.
While the contract clause never fulfilled its potential of protecting a general right to freedom of contract, by the late nineteenth century American courts began to assert that a right to contract free from unreasonable government regulations is protected by the due process clause of the Fourteenth Amendment. The first indications that the Supreme Court might be sympathetic to such a right are found in the dissents in the Slaughter-house Cases 3, by Justices Joseph Bradley and Stephen Field. Both dissents argued that the Fourteenth Amendment protects the right to pursue an occupation free from unreasonable government interference. Dissenting in Powell v. Pennsylvania, 127 U.S. 678 (1888), Field argued that the liberty protected by the due process clause includes “the right of man to be free in the enjoyment of the faculties with which he has been endowed by his Creator, subject only to such restraints as are necessary for the common welfare.”
Meanwhile, the Court’s liberty of contract jurisprudence rested on a tenuous intellectual foundation. By the 1920s libertarian views, especially on economics, had already been marginalized among American intellectuals and retained only a vestigial foothold among traditionalist elements in the legal community. The Great Depression eroded remaining support for liberty of contract. The Supreme Court’s commitment to private ordering in the economic sphere seemed outlandishly reactionary and insensitive to much of the public.
Despite the shift in the intellectual tides, the Court’s advocates of liberty of contract held fast to their views, and Court doctrine shifted only with changes in personnel. True to his essentially Progressive Republican nature, President Herbert Hoover (1874–1964) appointed three skeptics of freedom of contract to the Court—Justices Charles E. Hughes, Owen Roberts (1875–1955), and Benjamin N. Cardozo. By 1934, a majority had formed willing to broadly expand the “affected with a public interest” doctrine to the point where just about any regulation
In West Coast Hotel v. Parrish4., the Court reversed Adkins and upheld a minimum wage law for women. The Court argued that liberty of contract was merely a subset of liberty and could be abrogated in the public interest, as other Supreme Court precedents over the previous forty years had shown.
However, President Franklin D. Roosevelt shifted the center of gravity of the Court with a series of appointments, and the Court soon declared that economic legislation that allegedly violated freedom of contract was subject only to minimal constitutional scrutiny, to ensure that challenged legislation had a rational basis. Under this standard, the Court upheld a series of measures that would clearly have been unconstitutional under the prior regime, such as the National Labor Relations Act (United States v. Darby, 312 U.S. 100 ).
In Ferguson v. Skrupa, 372 U.S. 726 (1963), a unanimous Court went even further, and suggested that not even the Williamson’s extremely forgiving rational basis test need be satisfied because the Fourteenth Amendment provides no protection at all for freedom of contract.
4. Definition of Sanctity of Contracts:
“Sanctity of Contract is a general idea that once parties duly enter into a contract, they must honor their obligations under that contract. Whereas, efficient breach theory is that parties should feel free to breach a contract and pay damages, so long as this result is more economically efficient than performing under the contract.”5
Part of the Sanctity of Contract is the natural right to privacy therein. You absolutely have a right to privacy in your agreements with others. You may waive this right to privacy, and your right to do so is absolute as well.
The court has never given it to subjective intention of the parties, meaning of words in a contract no matter how honestly and truthfully the parties intended them to be, has to be interpreted objectively to ensure certainty in law. Contract for illegal purposes and against public policy are void in law. Trivial breach will not be a breach of condition no matter how much the parties have intended it at the time of contract.
On the other hand, if a representation is important to the person making the statement, the court will give effect to it as a term of contract, a breach of which is a breach of contract. Time is of the essence will be upheld to give certainly in law.
5. Steps Involved in Contracts :
The first step in a contract question is always to make sure that a contract actually exists. There are certain elements that must be present for a legally binding contract to be in place.
The first two are the most obvious:
5.1 An offer:
An expression of willingness to contract on a specific set of terms, made by the offer or with the intention that, if the offer is accepted, he or she will be bound by a contract.
An expression of absolute and unconditional agreement to all the terms set out in the offer. It can be oral or written. The acceptance must exactly mirror the original offer made.
A counter-offer is not the same as an acceptance. A counter-offer extinguishes the original offer. The offeree can’t make a counter-offer and then decide to accept the original offer. But a request for information is not a counter-offer. If the offeree asks the offeror for information or clarification about the offer, that doesn’t extinguish the offer; the offree is still has the rights to accept the offer if he does want.
It is very important to distinguish an offer from an “invitation to treat” that is, an invitation for other people to submit offers. Some everyday situations which we might think are offers are in fact invitations to treat. For example, in a store a Hugo Boss perfume is displayed and showing its price BDT 4,500 on a shelf. It doesn’t mean that, the perfume is placed in a shop is a offer made by the owner of the shop rather it has made an invitation to treat. When the customer will pick up that book and take it to the checkout, the customer makes the offer to buy the perfume for BDT 4,500. When the sales person at the cashbox takes the money, the shop accepts the offer, and a contract comes into being. In terms of auctions the original advertising of the auction is just an invitation to treat. When the bidder makes a bid, he makes an offer. When the hammer falls, the winning ‘offer’ has been accepted. The offeree now has a legally binding contract with the winning bidder so long as there is no reserve price that hasn’t been reached.
A counter offer may come upon the scene not bearing its badge upon its sleeve but dressed as an acceptance7 .
6. Essential Elements of Contracts :
Typically, in order to be enforceable, a contract must involve the following elements6:
6.1 A Mutual Consent:
The parties of the contract must have a mutual understanding of what the contract covers. For example, in a contract for a “smart phone”, the buyer thinks he will obtain an iPhone 4 and the seller also believes he is contracting to sell the same thing according to the buyers demand, then there is a contract is going to held on. But, if the buyer thinks he will obtain an iphone and the seller believes he is contracting to sell a Samsung Galaxy SII, there is no meeting of the minds and the contract will likely be held unenforceable.
6.2 Offer and Acceptance:
The contract involves an offer to an offeree, who accepts the offer. For example, in a contract for the sale of a Lancer EXi, the offeror may offer the car to the offeree at BDT 30lac. The offeree’s acceptance of that offer is a necessary part of creating a binding contract for the sale of the car.
But, if any kind of counter-offer is not an acceptance, and will typically be treated as a rejection of the offer. For example, if the offeree counter-offers to purchase the car for BDT 28lac, that typically counts as a rejection of the original offer for sale. If the offerer accepts the counter-offer, a contract may be completed. However, if the offerer rejects the counter-offer, the offeree will not ordinarily be entitled to enforce the prior BDT 28lac price if the offerer decides either to raise the price or to sell the car to somebody else.
6.3 Lawful Consideration:
“A consideration is some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.” “A consideration is an act or forbearance of one party or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”
In order to be valid, the parties to a contract must exchange something of value. In the case of the sale of a car, the offeree receives something of value in the form of the car, and the offeror receives money in return. While the validity of consideration may be subject to attack on the basis that it is illusory or that there is a failure of consideration, these defenses will not let a party to a contract escape the consequences of bad negotiation. For example, if a offeror enters into a contract to sell a Lancer EXi for BDT 20lac, and later gets an offer from somebody else for taka 30lac, the offeror can’t revoke the contract on the basis that the car was worth a lot more than he bargained to receive. There are four legal maxims that apply to consideration:
- Consideration must move from the promissory .
- Consideration need not move to the promisee6.
- Past consideration is not good consideration.
The consideration given must be sufficient, but it need not be adequate.
6.4 Performance or Delivery:
In order to be enforceable, the action anticipated by the contract must be completed. For example, if the offeree pays the BDT 30lac purchase price, he can enforce the contract to require the delivery of the car. But, unless the contract provides that delivery will occur before payment, the offeree may not be able to enforce the contract if he does not perform by paying the BDT 30lac. Similarly, again depending upon the contract terms, the offeror may not be able to enforce the contract without first delivering the car. In a typical “breach of contract” action, the party claiming the breach will declaim that it performed all of its duties under the contract, whereas the other party failed to perform its duties or obligations.
6.5 Good Faith :
It is implicit within all contracts that the parties are acting in good faith. For example, if the seller of the Galaxy SII knows that the buyer thinks he is purchasing a mobile iPhone, but secretly intends to sell the buyer a Galaxy SII, the seller is not acting in good faith and the contract will not be enforceable.
6.6 No Violation of Public Policy :
In order to be enforceable, a contract cannot violate public policy. But, the public policy can be shifted. Traditionally, many states refused to honor gambling debts incurred in other jurisdictions on public policy grounds. However, as more and more states have permitted gambling within their own borders, that policy has mostly been abandoned and gambling debts from legal enterprises are now typically enforceable.
6.7 Oral Contracts :
It can be very difficult to prove that an oral contract exists. Absent proof of the terms of the contract, a party may be unable to enforce the contract or may be forced to settle for less than the original bargain. Thus, even when there is not an opportunity to draft up a formal contract, it is good practice to always make some sort of writing, signed by both parties, to memorialize the key terms of an agreement. At the same time, under most circumstances, if the terms of an oral contract can be proved or are admitted by the other party, an oral contract is every bit as enforceable as one that is in writing. There are, however, “statute of fraud” laws which hold that some contracts cannot be enforced unless reduced to writing and signed by both parties.
7. Types of contract:
There are basically three types of contracts.
- Express Contract
- Implied Contract
- Quasi Contract
7. 1.Express Contract:
Express Contract is a contract in which the agreement of the parties has been expressed in words, either in oral or written form. An exchange of promises in which the terms by which the parties agree to be bound are declared either orally or in writing, or a combination of both, at the time it is made. Whether oral or written, the contract must manifest a mutual intent to be bound expressed in a manner capable of being understood, and include a definite offer, unconditional acceptance and consideration. 10
An express contract is differs from implied contract only in the mode of establishing assent and the mode of proof required; the distinction involves no difference in legal effect. Both forms of contract require mutual assent and a meeting of the minds, but an express contract is proved by an actual agreement where an implied contract in fact is proved by circumstances and the conduct of the parties. An acceptable alternative way of describing an express contract is; a contract in which the terms have been agreed upon either orally or in writing.
For example, the landlord presents the tenant with a preprinted lease on the apartment and the tenant wants and agrees to the terms and signs it. This is an express, written contract.
7.2. Implied Contract:
An Implied Contract is a contract where the agreement of the parties is indicated by their conduct. Acceptable alternative ways of describing an implied contract are; a contract in which the performance of the parties infers agreement. The parties indicate their agreement to a contract by their actions, rather than by making a promise.
For example, a transporter regularly ships a garment owner’s goods and there is no written contract between them but it acts like a written agreement.
7. 3.Quasi Contract:
A quasi contract is an obligation that is imposed by the courts to avoid injustice or unjust enrichment. Acceptable alternative way of describing a quasi-contract is, an implied-in-law contract imposed by the courts to prevent injustice. We can also say that, a quasi-contract is a special form of contract that lacks mutual assent of the parties but which is imposed on the parties by the courts to avoid injustice. For example, a supplier supplies to the buyer bad goods and the buyer refuses to pay as there is no contract exists. Therefore, the supplier goes to the court and claims for his payment. Then the verdict of the court allows the buyer to pay the supplier. This is an example of Quasi Contract.
8. Statute of Frauds:
A “statute of frauds” requires that certain contracts be in writing, and that they be signed by all parties to be bound by the contract. Although there can be significant variation between jurisdictions, the most common types of contracts to which a statute of fraud applies are:
- Contracts involving the sale or transfer of land
- Contracts to answer for the debt or duty of another
- Contracts that, by its terms, cannot be completed within one year
- Certain contracts for the sale of goods, under the Uniform Commercial Code
Typically, to satisfy the requirements of the statute, the writing must identify the contracting parties, recite the subject matter of the contract such that it can reasonably be identified, and present the essential terms and conditions of the parties’ agreement. Even without respect to the Statute of Frauds, it is good practice to reduce the essential terms of any contract to a signed, written agreement. Even when a Statute of Frauds does not apply to an oral contract, it may be very difficult to prove and enforce the contract in the absence of a written agreement.
9. Some Information about Contracts 8 :
 Invitation to treat looks like an offer but actually is not like an offer rather inviting or inspiring the offer or to make an offer.
 An offer can be revoked at any time before it is accepted, so long as you inform the person you made the offer to that the offer no longer stands.
 One party receives only what the other party was already obligated to provide.
 The consideration received by one party is essentially worthless.
 UNIDROIT Principles (2004) Article 2.1.2 and 3.2.
 Consideration must move from the promisor, it does not necessarily have to move to the promisee. The promisor may provide consideration to a third party, if this is agreed at the time the parties contracted.
 If the subject matter of a contract is illegal, none can enforce the contract. A contract for the sale of illegal drugs violates public policy and is not enforceable.
 Sometimes an oral contract is referred to as a “verbal contract”, the term “oral” means “spoken” while the term “verbal” can also mean” in words”. Under that definition, all contracts are technically “verbal”.
 A quasi contract is not really a contract at all in the normal meaning of a contract. It is really an obligation imposed on a party to make things fair.
 The fact that a contract is not completed within one year does not mean that it is voidable under a statute of frauds. For the statute to apply, the actual terms of the contract must make it impossible for performance to be completed within one year.
 Under the Uniform Commercial Code, to satisfy the statute, the writing for the sale of goods need only be signed by the party to be charged, and a quantity term.
 Sometimes the phrase “verbal contract” is used to describe an unwritten or “oral” contract. As one meaning of “verbal” is “in words”, in order to avoid any ambiguity it is usually best opt refer to unwritten contracts as “oral contracts”.
10. Business contracts legal terms and definitions glossary:
Glossary of business contract terms – general, financial, property and Latin definitions – a translation guide for legal gobbledygook and contract jargon
Here is a business contracts terms and definitions glossary – essentially for UK, and a useful guide for anywhere else in the world. When you are involved in business contract negotiations – especially for your own business – you can achieve far better negotiated results if you have a good understanding of what contracts and their terminology actually mean. This will empower you to utilize your legal advice for specialist legal issues rather than strategic decision-making, over which you must have full control. If you are the boss, or accountable for a contractual outcome, you must understand contracts and their meaning.
A contract is an agreement that commits you or your business to a course of action. Therefore, it is important that you ask your solicitor or adviser to explain any language or terminology that you do not understand. 9
This guide provides plain English explanations for some of the expressions that you might come across, including:
- general contracts terms
- financial contracts terms
- property contracts terms
- Latin contracts terms
You should never sign any contract unless you have read and understood what it aims to do and what the terminology means.
11. general business contracts terms and definitions glossary
Acceptance – the unconditional agreement to an offer. This creates the contract. Before acceptance, any offer can be withdrawn, but once accepted the contract is binding on both sides.
Agent – somebody appointed to act on behalf of another person. The amount of authority to deal that the agent has is subject to agreement between the principal and the agent.
Arbitration – using an independent third party to settle disputes without going to court.
Breach of contract – failure by one party to a contract to uphold their part of the deal. A breach of contract will make the whole contract void and can lead to damages being awarded against the party which is in breach.
Collective agreement – term used for agreements made between employees and employers, usually involving trade unions.
Company seal – an embossing press used to indicate the official signature of a company when accompanied by the signatures of two officers of the company.
Conditions – major terms in a contract. Conditions are the basis of any contract and if one of them fails or is broken, the contract is breached.
Consideration – in a contract each side must give some consideration to the other. Often referred to as the quid pro quo – see the Latin terms below. Usually this is the price paid by one side and the goods supplied by the other
Consumer – a person who buys goods or services but not as part of their business. A company can be a consumer for contracts not related to its business – especially for goods or services it buys for its employees. Charities are also treated as consumers.
Due diligence – the formal process of investigating the background of a business, either prior to buying it, or as another party in a major contract.
Employment contract – a contract between an employer and an employee. This differs from other contracts in that it is governed by employment legislation – which takes precedence over normal contract law.
Implied terms – are terms and clauses that are implied in a contract by law or custom and practice without actually being mentioned by any party. .
Incorporate – inclusion in, or adoption of, some term or condition as part of the contract. It differs from its company law definition where it refers to the legal act of creating a company.
Joint venture – an agreement between two or more independent businesses in a business enterprise, in which they will share the costs, management, profits or benefits arising from the venture. .
Jurisdiction – a jurisdiction clause sets out the country or state whose laws will govern the contract and where any legal action must take place. Liability – a person or business deemed liable is subject to a legal obligation.
Limited liability – usually refers to limited companies where the owners’ liability to pay the debts of the company is limited to the value of their shares.
Misrepresentation – where one party to a contract makes a false statement of fact to the other which that other person relies on.
Service contract – directors and officers of a company are usually given service contracts that are different to a contract of service or employment contract.
Shareholders’ agreement – an agreement between all of the shareholders about how the company should be run and the application of the rights of the shareholders. This acts as a contract between the shareholders.
Trademark – a registered name or logo that is protected by law. Trademarks must be granted through the Patent Office.
From the above explanation we can easily conclude that, in a contract willingness of the all parties is required. Otherwise it will not be considered as any contract. To make a contract an offeror should place any offer to an offeree and the offeree willingly has to accept the offer. In the contract there should be a mutual consent between the parties otherwise the contract will not be a valid contract. Also it should be a lawful contract or the contract must not be contradictory with the state or region law. If the contract is not lawful then it will void the contract. The contract can be in any form, formal or casual, written or oral but must be regular and with a set of certain regular activities. Therefore, we can easily conclude with the statement that, a contract is a legal relationship between two or more people or parties who accept or refrain from doing certain act.
Arun Kumar Sen and Jitendra kumar Mitra , “Law of Contracts ” , Commercial Law including Company Law and Industrial Law , twenty-fifth edition, the worl press pvt. Ltd.,2008, pp. 09-201
Muhammad Ekramul Haque , Law of Contract , First edition , Anindya Prokashani, 2007,pp.27-70
David E. Bernstein , Freedom of Contract, Journal of George Mason University School of Law, 2010 , pp.8-51
Bernstein, David E. 2003. “Lochner Era Revisionism, Revised: Lochner and the Origins of Fundamental Rights Constitutionalism.” Georgetown Law Journal 92(1):1–60
Gillman, Howard. 1993. The Constitution Besieged: The Rise and Demise of Lochner Era Police Powers Jurisprudence. Durham: Duke University Press.
1 Salmond , Jurisprudence
2 Anson , Law of Contract
3 Slaughter – House Cases ,83 U.S.36 (1873)
4 In America law of contract under West Coast Hotel v. Parrish,300 U.S. 379 (1937)
5 Research paper on Contract by David E. Bernstein , Page no. 8 downloaded form http://ssrn.com/abstract_id=1239749
7 Cheshire and Fifoot , Law of contract , p.34 , 2nd ed.
6 Commercial Law & Industrial Law by Arun Kumar Sen & Jitendra Kumar Sen , Page no. 14-15
10 Law of Contract , Muhammad Ekramul Haque , P-34 , Para-2 , 1st ed.
9 See,Law of Contract , Muhammad Ekramul Haque, p-29 , Para-3 , Revised Publication -2007.