ELEMENTS OF A CONTRACT

Prepared by: R.C. Reyes

 Definition of terms
Contract – an agreement between two or
more parties for a certain act to be performed
or refrained from which has been arrived at in
such a manner, set forth in such form and is of
such content that it has enforceable legal
effect.
Obligation – constraining power of law, duty,
task, service, benefit or contract
Mutual Agreement – the contracting parties
agree, and they agree with the same thing.
 Classifications of contracts

 As to origin
 As to participants
 As to obligation status
 As to completion status
 As to form
 As to legal status
 As to origin
Express
 the promises of each party are expressed in writing or
speech.
Implied
 either the act of acceptance or both the act of acceptance and
the promise are inferred from the conduct or acts of the
parties.
 A contractual promise that is held to exist despite a lack of
express terms or agreement stating the promise
 As to origin
Quasi
 legal obligation similar to a contract and which is created by
the implication of law.
 For example, quasi contracts are created by the court when
no official agreement exists between the parties, in disputes
over payments for goods or services
 As to participants

Two party
 only two parties are involved

Joint
 One in which two or more parties merge into a contract with
another party or parties. In a suit under this contract, all the
promisors must be sued together and not separately.
 For example, if spouses both sign for a mortgage loan, they
are jointly liable for the amount of the loan.
 As to participants

Several
 one in which two or more persons enter into a contract with
another party or parties but keep their liability more or less
separate. A suit under this contract must be brought against
each of the promisors separately.
 For example, if three business partners co-borrow money for
their small business and the loan agreement states that they are
only severally liable, the lender may only sue the partner who
fails to fulfil his obligation.
 As to participants

Joint and Several

 In this contract, a plaintiff may sue the promisors either
jointly or severally.
 For example, if three business partners enter into a contract
for which there is joint and several liability -- and the contract
is subsequently breached -- one of them may be sued and may
end up paying all damages. It is then that partner's
responsibility to pursue the other partners for their share of
the liability.
 As to participants

Third-party beneficiary
 one in which two parties enter into a contract for the
protection of the interests of a third person who is not a party
to the contract.

Additional Considerations
For example, if a person is injured by a drunk driver, the injured
person can pursue the drunk driver or the bar that over-served
him. – a case of negligence
 As to obligation status

Bilateral
 one in which one party agrees to perform some certain acts in
return for which the other party agrees to perform certain acts.

Unilateral
 one in which there is a promise by one party to perform certain
acts provided the other party does certain things.
 Examples are reward promise and insurance contracts
 As to completion status
Executory
 obligation is assumed by one or both parties to do certain
acts at some time in the future.
 Example: Development contract- Contractor receives
payment from the owner when building milestones are
complete; contractor performs duties for the building owner.
 a lease contract agreeing to pay a specified amount each
month until the its paid off
 As to completion status
Executed
 everything is done at the time of making the contract and no
obligation for the future acts is assumed by either party.
 An executed contract is a legal document that has been
signed off by the people necessary for it to become effective
 a contract for purchase of a major appliance
 As to form
Contract under seal – one with a seal attached
Contract of record – those which exist as a consequence of
court judgment. Unless the judgment is entered by mutual
consent, these are actually quasi contracts.
Simple or Parol contract – written or oral, less formal than
a sealed contract.
 May be required to be in some specified form.
 May be required to be in writing but not to be in any
special form.
 Without requirement as to form or writing
 As to legal status
Valid –is one in which is in full force and enforceable by court
action.
Void – is one in which has no status at law and is therefore not
enforceable by court action.
Voidable- is one in which is binding on one party but may be
either binding or non-binding on the other party at his option.
Unenforceable- is one in which is valid in all respects except
that is unenforceable through court action.
 Essentials of a contact

In order for an agreement to be a

contract enforceable through the
courts, it is necessary that the
contents of the contract and the
procedures be in accordance with the
law.
1. There must be two or more competent contracting parties
2. There must be a mutual agreement on the part of all
parties to the contract to assume new obligations which each
party understands and which are possible for the parties to
perform.
3. There must be a valuable consideration for each of the
parties to the contract, and the consideration must be
reasonably equal in value.

Note:
valuable consideration - an equivalent or compensation
having value that is given for something acquired or promised
4. The obligations, which the parties to the contract undertake
must be for legal acts, which are not contrary to sound
public policy.
5. The contract must be set forth according to the form and
executed in the manner prescribed by law.
 Competency of contracting parties
Every contact must have two or more parties, all of
whom are legally competent to enter into contractual
relations. These parties may be either natural persons
or bodies created by law and authorized to enter into
contractual relations. The question of competency
may under certain conditions be raised in case one of
the parties falls into any one of the following:
1. infants
2. persons of unsound mind
3. drunken persons
4. persons under legal guardianship
5. convicts
6. corporations
7. enemy aliens
8. federal and state govt.
9. foreign countries
10. professional persons who are required
by law to register and to be licensed.
 Agency

Closely related to the question of

competency is that the making and performing
of contracts through the function of agency.
The validity of such contracts depends
upon the authority granted to the agent, which
may be express and in writing (ex. written
power of attorney).
 Mutual Agreement
It is essential to the validity of a
contract that the parties agree, and they
agree with the same thing. There must be
an actual agreement and not an apparent
agreement.
The contract is not binding if the
parties did not agree with any of the
following:
1. Offer and acceptance identical
2. time of acceptance
3. method of acceptance
4. revocation
5. misrepresentation
6. fraud
7. duress
8. undue influence
There must be a
Lawful and
sufficient valuable
consideration
Good consideration – is one based on love,
affection, or blood relationship and founded on
generosity or natural duty.
Valuable consideration – is one where the law
holds that there is something equivalent given
for the act or promise, such as money, labor etc.
To constitute a valuable consideration, a person
must give or promise to give something of value
in exchange of some other thing of value.
Gift – not founded on a valuable consideration.
Subject matter of a
contract must be
lawful and not
contrary to sound
public policy
If a contract is to be enforceable by law, the
thing sought to be accomplished by the
contract must be lawful.
Class of contracts opposed to law:
1. contracts for the sale of a public office,
or for bribing of public official
2. contracts for the committing of a crime,
etc.
Legal requirements as to form

There are legal requirements that

certain contracts must take.
Certain information which must
be included may be specified, or
the requirement may only be that
the contract shall be in writing.
Contracts should be placed in writing if it
includes any of the following. (ex)
- a special promise to render himself
personally liable for debts of the deceased or
another person.
- Any agreement or contract for sale,
leasing or construction of a property.
 Interpretation of a contract

In general, contracts will be construed so as to give effect to real

intention of the parties. In determining what such intention is,
the following rules are used:
- If there are contradictions between written and printed
parts, the written part will govern.
- If the contract is capable of two interpretations, one of
which would render it void or incapable of performance and the
other valid.
- Words are given their plane or literal
meaning except that evidence of local
usage may vary their meaning, and
technical words will be given their
technical meaning.
- If there is doubt as to the meaning
of the contract, the construction given by
the parties will be given weight.
Penalties and
Liquidated
Damages
 Liquidated Damages

In case of breach of contract, the party aggrieved may

collect from the other party a certain specific amount
as damages or liquidated damages.
In determining whether it is in fact liquidated
damages, the courts will pay no attention to what the
parties to the contract have called it.
 Liquidated Damages

If the amount of damage is of uncertain value, the sum

stipulated is will be liquidated damages.

Ex.
To make a debt payable in installments or payable in
whole on the failure to pay an installment when due.
 Penalty

If the amount of damage is readily

attainable and the amount
stipulated is very much in excess
of this amount, it will be deemed a
penalty and therefore not
enforceable.
 Discharge of contracts
The engineer must understand how a contract may be
discharged for him to know how to enter into a
binding, valid and legal contract. The ways in which a
contract may be discharged are as follows:
discharge by performance
impossibility of performance
substantial performance - alteration of the agreed manner of
performance
discharged by agreement
discharged by operation of law
discharged by statute of limitations
Remedies for a breach of contract

Where there has been a breach of contract certain rights are

acquired by the injured party.
He may either sue and recover damages actually
suffered by him, or he may enter into an agreement with
the other parties of the contract to accept a certain
amount in payment of the breach.
Remedies for a breach of contract

This is commonly known as accord and satisfaction; and

the usual method pursued then is for the injured party, upon
the payment agreed upon, to give a formal release of the
contract and all liabilities and rights arising because of the
breach of contract to the other party so paying the money.
 Summary
Ordinary Business Transactions
Almost all business transactions involve contracts, either
actual or implied, that no written memoranda are either necessary or
desirable.
Ex:
A calls B, a coal merchant, by telephone and inquires the price
of hard coal. B replies $9 per ton. A asks to have ten tons delivered.
B delivers the coal ; A sends a check for $90. The transaction is
complete ; an oral, express contract has been entered into and
performed; no writing was necessary.
 Summary
Necessity of Written Agreements
When, however, the transactions become at all complicated,
and where much time will elapse prior to or before final
performance, the details of the agreement may become indistinct or
uncertain in the minds of one or both of the parties, unless the same
are reduced to writing.

Especially where it is at all complicated by general or

technical specifications of any kind that may possibly be is
understood, overlooked or forgotten before its execution, or where
other grounds of dispute may possibly arise.
 Summary
A Contract Made by Letter
In simple transactions the contract may consist of an inquiry,
an offer and an acceptance in the form of letters, which together will
constitute a contract.

Ex.

An offer of a supplier to constructors indicating its prices through a

letter and an acceptance of constructors to by placing orders and
asking for delivery.
 Summary
Written Executory Contracts

may include:
1. Parties to the contract (names, description, residence, etc.).
2. Subject matter:
Promises to be performed (work, materials, etc., to be
furnished or done).
Counter-promises (payments to be made).
3. Time of performance.
4. Date of contract.
5.Signatures.
 Summary
Written Executory Contracts

The following are suggested as the headings under which the data
for an agreement may be prepared:

Outline for Agreements

1. Introduction of agreement and date of same.
2. Designation of parties, name, description and residence.
3. Declaration of agreement, parties and legal representation.
4.Exhibits as attached conditions, specification, drawings, etc.
5. Time of beginning and completion.
6. Liquidated damages.
7. Payment.
8. General provisions, bond, etc.
9. Final clauses, date or reference to date, signatures, seal, witnesses and
acknowledgment.