1. Introduction: A contract is an agreement entered into voluntarily by two parties or more with the intention of creating a legal obligation, which may have elements in writing, though contracts can be made orally. The remedy for breach of contract can be “damages” or compensation of money. In equity, the remedy can be specific performance of the contract or an injunction. Both of these remedies award the party at loss the “benefit of the bargain” or expectation damages, which are greater than mere reliance damages, as in promissory estoppel. The parties may be natural persons or juristic persons. A contract is a legally enforceable promise or undertaking that something will or will not occur. The word promise can be used as a legal synonym for contract. although care is required as a promise may not have the full standing of a contract, as when it is an agreement without consideration.
2. Legal Elements of a Contract:
The essential elements necessary to form a binding contract are usually described as: i
• An Offer
• An Acceptance in strict compliance with the terms of the offer
• Legal Purpose/Objective
• Mutuality of Obligation – also known as the “meeting of the minds”
• Competent Parties ii
An offer is defined as the manifestation of the “willingness to enter into a bargain so made as to justify another person in understanding that his assent to the bargain is invited and will conclude it.”
Acceptance of an offer can occur in several ways: Acceptance of an offer is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer. An acceptance must not change the terms of an offer. If it does, the offer is rejected.v A material change in a proposed contract constitutes a counteroffer, which must be accepted by the other party.
2.3 Legal Purpose:
The objective of the contract must be for a legal purpose. For example, a contract for illegal distribution of drugs is not a binding contract because the purpose for which it exists is not legal.
2.4 Mutuality of Obligation:
This element is also known as the “meeting of the minds”. Mutuality of obligation refers to the parties’ mutual understanding and assent to the expression of their agreement. The parties must agree to the same thing, in the same sense, at the same time. The determination of a meeting of their minds, and thus offer and acceptance, is based on the objective standard of what the parties said and did and not their subjective state of mind. Unexpressed subjective intent is irrelevant. In determining whether mutual assent is present, the court looks to the communications between the parties and to the acts and circumstances surrounding these communications. The offer must be clear and definite just as there must be a clear and definite acceptance of all terms contained in the offer. Where a meeting of the minds is contested, the determination of the existence of a contract is a question of fact. If the fact finder determines that one party reasonably drew the inference of a promise from the other party’s conduct, that promise will be given effect in law.
2.5 Certainty of Subject Matter:
In general, a contract is legally binding only if its terms are sufficiently defined to enable a court to understand the parties’ obligations. The rules regarding indefiniteness of material terms of a contract are based on the concept that a party cannot accept an offer so as to form a contract unless the terms of that contract are reasonably certain. Thus, the material terms of a contract must be agreed upon before a court can enforce the contract. Each contract should be considered separately to determine its material terms.
As a general rule, an agreement simply to enter into negotiations for a contract later also does not create an enforceable contract. Parties may agree on some of the terms of a contract and understand them to be an agreement, and yet leave other portions of the agreement to be made later.
Consideration is an essential element of any valid contract. Consideration consists of either a benefit to the promisor or a detriment to the promisee. It is a present exchange bargained for in return for a promise. It may consist of some right, interest, profit, or benefit that accrues to one party, or alternatively, of some forbearance, loss or responsibility that is undertaken or incurred by the other party. It is not necessary for a contract to be supported by a monetary consideration.
2.7 Competent Parties:
Parties to a contract must be competent and authorized to enter into a contract.
3. power-conferring rules:
H.L.A. Hart, following others before him, draws our attention to the difference between duty-imposing and power-conferring rules. Duty imposing rules require persons “to do or abstain from certain actions,
whether they wish to or not.”1 The law of theft, for example, instructs persons not to steal, no matter what their personal preferences are. Power conferring rules “provide that human beings may by doing or saying certain things introduce new [duties], extinguish or modify old ones, or in various ways determine their incidence or control their operations.”2 Thus constitutions provide procedures whereby legislatures can act to create new laws or extinguish old ones when a majority of their members so desire. Some theories of contract law characterize it as a private power conferring rule, others as a duty-imposing one. Hart suggests contract is a legal power: Legal rules defining the ways in which valid contracts or wills or marriages are made . . . provide individuals with facilities for realizing their wishes, by conferring legal powers upon them to create, by certain specified procedures and subject to certain conditions, structures of rights and duties within the coercive framework of the law.3 Consider power-conferring rules. A rule can give legal actors the ability to effect normative change, when they wish, only if it is structured such that those actors commonly satisfy the rule’s requirements because they want the resulting change. More precisely, the distinctive function of laws that create powers entails two features that together distinguish them from laws that impose duties. First, a law that creates powers must be designed in a way that underwrites an expectation of its purposive use—an expectation that persons will satisfy the law for the sake of the legal consequences. Second, that expectation must be the law’s reason for attaching those legal consequences to acts of that type. Evidence of this second feature can be found in rules that facilitate or enable the law’s purposive use. To identify whether any given law is power creating, we can look to see whether it exhibits these characteristic features. Evidence that power-conferring laws anticipate and facilitate their purposive use can often be found in rules that condition an act’s legal consequences on evidence of the actor’s legal purpose. Many power conferring
laws require for their exercise the performance of conventional legal speech acts or legal formalities. Legislators use ritualized procedures to vote, judges use special words and writings to announce holdings, a will must be witnessed and delivered, a power of attorney must be in a proscribed form. Such conventional speech acts function, among other things, to ensure that the legal actor who performs them expects and intends the relevant legal consequences. Other power-conferring laws
require other sorts of evidence of legal purpose. Thus the effectiveness of a deed depends on an expression of the right legal intention, “which is found upon examination of the whole instrument to be plainly though unethically expressed.”10 Along similar lines, the Office of Legal Counsel has opined that the effectiveness of a presidential order does not depend on “the form or caption of the written document” but on the substance of what is said.11 Here a requirement that the actor perform an act with the right meaning—that she express the right illocutionary intent— ensures, inter alia, that she intends the legal consequences of her act. All of this is to say that if contract law is a power-conferring law, it is an odd one. Most power-conferring laws employ rules that clearly condition the legal consequences of an action on the actor’s legal purpose. Such laws wear their power-conferring function on their sleeve: Validity conditions that sort for legal purpose anticipate and enable the law’s purposive use.In fact, validity conditions that sort for legal purpose are strong evidence that the law’s only function is to establish a legal power. If a law serves no purpose but to allow persons to effect legal change when they wish, it is not merely senseless but also counterproductive to apply it to acts not done for the sake of their legal consequences. To allow a person’s actions to effect a legal change she neither expects nor wants is not to grant her control over the law but to take it away. Consequently,
where a law is meant only to give persons the ability to effect legal change, we should expect it to include validity conditions that sort for legal purpose. By the same token, the presence of conditions of legal validity that sort for legal purpose indicates that this is the law’s sole function. One way to try to rescue a power-conferring picture of contract is to argue that the consideration requirement is a validity condition of this sort. Thus Lon Fuller’s suggestion that consideration is a “natural formality,”15 separating out for legal enforcement agreements in which “a legal transaction was intended.”16 But this is hardly the only, or the most obvious, interpretation of the consideration rule. Fuller himself observed
that exchange also marks agreements “of sufficient importance to our social and economic order to justify the expenditure of the time and energy necessary” for enforcement.17 Other explanations of consideration include the special moral qualities of exchange relationships, doubts about judicial competence to assess when to enforce gratuitous promises, and the argument that the rule is a historical anomaly, a myth created by Holmes and Williston that does not accurately describe how contract law functions. The consideration requirement provides, at best, equivocal support for an interpretation of contract law on the model of most power-conferring laws. More generally, it is simply not obvious that the conditions of contractual validity are designed to sort for legal purpose. There is, however, another way to understand contract as a legal power, one that suggests an important difference between contract law and most power-conferring laws, and which expands our understanding of normative powers in general. The core thought is that it is possible for a law to anticipate and enable its purposive use without conditioning the legal effect of a person’s actions on evidence of her legal purpose. I suggest reserving the term “power-conferring” for laws that include
validity conditions that sort for legal purpose, such as those discussed in the previous paragraphs. I use the term “compound law” for laws that do not condition the legal consequences of an act on evidence of the actor’s legal purpose but are structured in a way that both ensures that a significant proportion of actors subject to them are likely to have such a purpose and recognizes and facilitates that purposive use. As distinguished from power conferring laws, the structure of compound laws suggests that they function both to impose duties and to create powers.
4. TERMS OF CONTRACTS:
4.1. IMPLIED TERMS
European and American contract law both recognize that a contract does not consist only of the terms expressly agreed upon by the parties. Instead, a contract also may include implied terms. The Principles of European Contract Law captures this idea in the following rule:
In addition to the express terms, a contract may contain implied terms
which stem from
(a) the intention of the parties,
(b) the nature and purpose of the contract, and
(c) good faith and fair dealing.
An illustration to this rule suggests that if a company hired tax advisers to prepare a tax return, the contract would contain an implied term that the tax advisers would complete their work by the legal deadline for submitting the return. Modern American contract law follows the same general principle with
essentially the same results, but it uses slightly different terminology. The Restatement (Second) of the Law of Contracts says that contracts consist of “agreed terms” and “terms supplied by law.” The agreed
terms a contract “are those expressed in the language of the parties or implied in fact from other conduct.” For example, if a customer says hello to a barber and sits in the barber’s chair, the customer is agreeing to pay the barber’s usual price for a haircut, even if the barber and the customer never expressly discuss the formation of a contract or any of its terms. Terms supplied in law are terms which the law considers important for the contract to include regardless of whether the parties actually have agreed upon them.
One example is the duty of good faith. Regardless of what the parties intend, “every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement.” In addition, terms supplied by law include “essential terms” that parties for some reason have omitted from an enforceable agreement. The Restatement (Second) of the Law of Contracts includes the following rule:
Supplying An Omitted Essential Term
When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.
4.2. MODIFICATION OF TERMS
In the United States, agreements modifying the terms of a contract generally are permissible. But defendants routinely make four arguments against the enforcement of modifications:
First, defendants sometimes argue that the modification was never made. An agreement to modify a contract generally must satisfy the requirements of offer and acceptance described in Section 3 above. But there is an importantexception. A defendant can waive rights under a contract unilaterally.
a buyer may “abandon” the right to insist that the seller deliver a deed to property on the date originally agreed upon in the contract. Second, defendants sometimes argue that a promise to modify a contract
is not enforceable because it lacks consideration. For example, “A promise modifying a duty under a contract not fully performed on either side is binding if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made Third, defendants sometimes argue that the modification was not evidenced by a signed writing and therefore is not enforceable under the statute of frauds. The rule is as follows: “For the purpose of determining whether the Statute of Frauds applies to a contract modifying but not rescinding a prior contract, the second contract is treated as containing the originally agreed terms as modified. Fourth, defendants sometimes argue that the alleged modification is not enforceable because the original contract contained a clause saying that the contract could not be modified.
The contract shall be regarded as concluded, if an agreement has been achieved between the parties on all its essential terms, in the form proper for the similar kind of contracts. As essential shall be recognized the terms, dealing with the object of the contract, the terms, defined as essential or indispensable for the given kind of contracts in the law or in the other legal acts, and also all the terms, about which, by the statement of one of the parties, an accord shall be reached. The contract shall be concluded by way of forwarding the offer by one of the parties and of its acceptance by the other party.
- American Law Institute, Restatement of the Law, Second, Contracts 2d (E.
Allan Farnsworth, rptr. 1981) (American Law Institute Publishers) (three
- Commission on European Contract Law, Principles of European Contract
Law, Parts I & II (Ole Lando & Hugh Beale, eds. 2000) (Kluwer Law
International, ISBN 90-411-1305-3)
- Commission on European Contract Law, Principles of European Contract
Law, Part III (Ole Lando et al., eds. 2003) (Kluwer Law International,