Business LawMAN-3

Bakiev Erlan, Ph. D.

Contracts

1 Nature of contract2 Elements of contract formation3 Offer4 Acceptance5 Consideration6 Intention to create legal relations7 Capacity to contract8 Legality of object9 Requirement of writing10 Contract interpretation

1 Nature of contract

1.1 ContractA promise or set of promises which

the law will enforce.China: an agreement the law will

enforce.

1.2 Contract lawWhere people make law for themselvesWhere people can express their

individual preferencesIt accommodates most relationships

with minimum conflictThe prime example of law in its

facilitative role.

2 Elements of contract formation(1) Offer(2) Acceptance(3) Consideration(4) Intention to create legal relations(5) Capacity to contract(6) Legality of object(7) Requirement of writing

3 Offer3.1 Nature(1) A tentative promise made by offeror subject to

conditions or containing a request to the offeree(2) Invitation to treat, invitation to offer

Display of goodsMail of catalogueNewspaper & mass media advertisement

(3)ExceptionAdvertisement selling fixed number

of items at fixed price on first come first to serve basis

Reward advertisement3.2 Communication

(1)Orally, or in writing, or by gesture (2)Offer is communicated upon receipt.

(3) Offeree can not accept an offer until first learning of it.

One may find and return a lost article to the owner unaware of the reward ad. N.

Cross offer:A writes to B offering to sell her car for $100

and B has written a letter crossing A’s letter proposing to buy A’s car for $100. No contract unless anyone makes subsequent acceptance.

3.3 Standard form (model form)(1) “See back”, “see the reverse side”, or “notices”(2) Document provider: adequate notice to offeree.

Else, invalid.

3.4 Lapse and revocation(1) Lapse

Expiration: if time is fixedAfter reasonable timeEither party dies or becomes incompetent

(2) RevocationWithdraw anytime before acceptanceEffective upon receipt by offeree

Case study:• A sends a letter dated March 5 to B offering to

sell its house for $1000, saying the offer is open until March 9 and it must have heard from B by then. B receives it on March 6 and immediately prepares letter of acceptance. Before B delivers his acceptance in the morning of March 7, A changes its mind and calls B saying it cancels the offer.

Revocation is valid.

(3) RejectionIs this good (best) price?(4) Counter offerIt is the rejection of previous offer

and birth of new offer

4 Acceptance4.1 Positive nature(1) Words or conduct

Habitual act(2) Silence

Offeror normally can’t stipulate it as mode of acceptance

Habitually used, or agreed in advance: Y

4.2 Communication(1) Same or advantageous method of communication(2) By stipulated method as per offeror’s advice(3) Post rule (telegram)

Valid upon dropping the letter in mailboxException: offeror stipulated speedier method than

post(4) Unilateral contract: no communication(5) Other situations

Valid upon receipt of acceptanceTelephone: dead line, acceptance is ineffective.

4.3 Place of formation(1) Contract is formed in the place where the

acceptance takes effect.(2) Instantaneous communication: place

where offeror receives acceptance

5 Consideration5.1 Meaning

It is the price for which the promise of the other is bought

Exchange of promise: contractAny party have both gains and losses

5.2 What constitute consideration?(1) Anything having market value(2) Exception:

LoveGratitudePast consideration

5.3 Adequacy(1) No requirement: exchange of equal

value(2) $ 1 is adequate consideration

Case study ：Adams, creditor of Brown, threatened to sue

Brown for the debt of $ 1000. Cox, friend of Brown, then promised to pay Adams the debt if Adams would refrain from suing, and Adams agreed. If Cox failed to pay Adams as agreed, and Adams sued him for breach of contract, Adams would succeed.

Forbearance to sue is adequate consideration.

5.4 Gratuitous promises: N (1) Gift promise is gratuitous, not amount to contract

for lack of consideration. (2) Promisor isn’t bound by gratuitous promise, once he

undertakes the performance of it, he should do it without negligence. He is liable, if he injure the promisee.

5.5 Motive contrasted with consideration: past consideration, N

(1) Motive is irrelevant. It does not affect the question of consideration.

Case study– Adams saved Bodnar from drowning.

Afterwards Bodnar promised to pay Adams $ 100 out of gratitude. Bodnar’s promise was made for “past consideration”, therefore unenforceable.

5.6 Existing legal duty: N(1) Statutory duty: N Police, teacher, etc. A promise to members of crew to increase

their pay if they don’t desert the ship, is unenforceable.

(2) Existing contractual duty: NShield against economic blackmail:

construction firmAdd difficulty for contract

modification: in order for it to be enforceable, “peppercorn” type negligible value or under seal may be good choice.

5.7 Gratuitous reduction of debt: N(1) Consideration makes debt reduction difficult.(2) Way out

Time is of value. Payment before due date is sufficient consideration.Trade the debt with object of negligible value.Third party purchases the debt from the creditor: debt transaction.Creditor agrees in writing and under seal to reduce the debt.

A owed B $1000 falling due on March 1. B needed money urgently. He would not care if A could not repay the same amount. His reduction of the debt can only be enforceable under the following manners:

★ B agreed to reduce it to $800, in return A would repay him before March1.

★ B agreed to abandon the debt, in return A gave him something of value, e.g., a watch★ A’s friend, C agreed to pay B $800, in return B would refrain from suing A.★ A and B made the debt reduction agreement in writing and under seal.

6 Intention to create legal relations

6.1 Business agreement (1) Rule: such intention is presumed present. (2) Exception: hard evidence to prove that they are not

serious.6.2 Family, domestic arrangement (1) Rule: such intention is presumed not present. (2) Exception: hard evidence to prove that they are

serious. (3) Reliance cost, pre-contract fault liability

7 Capacity to contract7.1 Minors(1) Necessaries: enforceableTwo criteria determining necessity: must be necessary in

relation to his station in life; must not already have adequate stock of them.

Food, clothing, lodging, medical attention, legal advice and transport: Y

Expensive jewelry, love: NOnly liable for reasonable price, not contract price. In

Chinese: tong sou wu qi

(2) Not liable for non-necessariesMay repudiate if the goods are still in his possession If he sells, can’t repudiate unless returns the money paid.People trading with minor run two risks: whether he will pay for it;

whether he will refund.(3) Contract indirectly affecting minorAdult can recover money lent to minor only if in fact used for

necessities. If it is spent at races, lender can’t recover it.Exemption from contract liability, no exemption from tort liability.

Case studyA minor hires a riding horse promising to

handle with care. In his exuberance he injures the horse by riding too hard.

The owner can’t sue A for breach of contract for riding horse is non-necessary. He may not A for tort of negligence either. He can only sue A something outside of the contract.

(5) Upon attaining majorityRepudiate non-necessity contract

acquiring permanent continuous interest. Else, enforceable.

Ratify non-necessity contract without continuous interest, then enforceable.

7.2 Other person of diminished capacity (1) Unsound mind (2) Incapacitated through drink or drugs (3) Protection: similar to minors.7.3 Corporations (1) It can make any contract that natural person does.

Most company laws adopt this. (2) Ultra vires: abandoned7.4 Bankrupt debtors (1) Under certain contractual disabilities, until he receives

a discharge from the court.

8 Legality of object8.1 Void v Illegal contract (1) Void: restore to position before contract

was attempted. (2) Illegal contract: no remedy for plaintiff. If

property has been transferred, no recovery will be allowed.

8.2 Illegal by statute (1) smuggling, drug traffic, sex dealing etc.

8.3 Illegal by common law and public policy (1) Contract contemplating the commission of tort, is illegal. (2) Promise to pay witness for appearing or not appearing to

give evidence in criminal procedure is illegal.8.4 Void by statute (1) Any provision in employment contract depriving

employee’s protection of Worker’s Compensation Act. (2) Bankruptcy Act: transfer of property by gift or at

inadequate price 12 months before bankruptcy is void.

9 Requirement of writing(1) Contract concerning interests in land(2) Not to be performed by either party with 1 year (3) Ratifying minor’s contract(4) Guarantee(5) Arrangement made in consideration of marriage(6) Executor’s promise to answer damages out of his

own estate

10 Contract interpretation10.1 Express terms (1) Plain-meaning (strict) approach, liberal

approach10.2 Parol Evidence rule: oral evidence10.3 Implied terms as a method of interpretation