BUSINESS LAW 1

LAW 201

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CONTRACTS
 Is there a Contract?
Is there a valid:
 Offer

 Acceptance

 Consideration

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CONTRACTS

• Is contract enforceable?
Contract is not enforceable if it is:
a. Voidable due to:
lack of capacity or voluntary consent
b. Void due to illegality
c. Unenforceable because it lacks a written
agreement if required by law
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CONTRACTS
 Who can enforce the contract?
a. Contracting parties
b. Assignees, and creditor or donee beneficiaries

 Was the contract breached and if so, what are the remedies?
a. No breach of contract if:
-conditions (set in contract) are not met
-Performance is adequately completed or excused, or discharged
b. If contract was breached the remedies are:
-Damages
-Specific performance

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Creating a Contract: Offers
 When a dispute arises between the parties to a
contract, there are two basic questions to
answer:
 Did the parties in fact have a contract?
 If they did, what are the terms?
 The deciding factor is to look for, whether the
parties entered into a contract is an
agreement, or a “meeting of minds”.
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Offers
 The basic formula for a contract is:
 Offer + Acceptance = Agreement
 An offer is the manifestation of a willingness to enter into a
contract if the other person agrees to the terms.
 If there is no offer, there is nothing to accept and a contract
can not be created.
 A person who has made the offer (the offeror) has given the
party to whom he or she has made the offer (the offeree) the
power to create a binding contract by accepting. Also
important is the knowledge of terms of offer, since the offer
often contains all the terms of contract.

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Offers
 The basic requirement for the creation of an
offer is presence of intent on the part of the
offeror.
 These requirements are met when the offer is
definite and has been communicated to the
offeree.

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Offers
 When a person objectively signifies to another
his/her willingness to do or abstain from doing
anything, with a view to obtaining the assent of that
other to such act or abstinence, he/she is said to
make an offer.
 Thus an offer should have the expression of
 Willingness to do or abstain
 to another person
 obtaining assent
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Offers
 If the offer is not definite it can be termed as
an “invitation to offer” or “an invitation to
negotiate” and shall not have legal sanctity.
 The act of communicating the offer indicates
that the offeror is willing to be bound by its
terms.
(Refer Case ProCD, Inc. vs. Zeidenberg 1996 pg. 130 text book)

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Offers
 Special problems with offers:
 Advertisements –
(Jackson v. Investment Corp. of Pal Beach 1991 pg. 131)
 Rewards
 Auctions
 Bids

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Offers
 How Long Do Offers Last?
 Terms of Offer
 Lapse of Time
 Revocation
 Firm Offers
 Options

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Offers
 Revocation:
 Revocation of Unilateral Contracts-
Can be revoked any time,
reasonable value to be paid if offeror benefits,
if did not benefit-reasonable time.
 Effective revocation
 Rejection
 Death or insanity of either party
 Destruction of subject matter
 Intervening illegality
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Acceptance
 Once it is proved that one of the parties to a dispute
made an offer. The next step towards a binding
contract is to look for acceptance of offer.
 If all the surrounding circumstances show the same
intent to contract by both the parties and the offeree
in effect expresses/communicated “yes”, it is an
acceptance.
 The offeree must, however, accept the offer on the
offeror’s terms.
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Acceptance
 There is a valid contract if there is:
1. Intent
Objectively manifested
2. Exactness
No material changes from the offer
3. Communication
-In the stipulated manner as spelled out in the offer
-By an expressly or impliedly authorized means (effective when
dispatched)
-By a non-authorized means (effective when received)
(Reddick v. Globe Life & Accident Insurance Co. 1991 pg. 148)

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Consideration
 Consideration is a legal value, bargained
for and given in exchange for an act or
promise.
 The requirement for consideration should
have a promise to pay the “price” the
promisor asked for in order to gain the right to
enforce the promisor’s promise.
 A promisee’s consideration may be an act or a
promise.
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Consideration
 Consideration can have legal value in any of the
following two ways:
1. If the promisee does or agrees to do something he
or she had no prior legal duty to do in exchange for
the promisor’s promise that provides legal value.
2. If the promisee agrees not to do something he or
she has no prior legal right to do in exchange for the
promisor’s promise that also provides legal value.
e.g. Quit smoking (no apparent monetary value) and the Grand mother pays $500
NOTE: Refer example cases on page 160 for solving consideration related problems

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Consideration
 Adequacy of Consideration:
 Legal value has nothing to do with adequacy of
consideration. Freedom to contract is the freedom to
make bad bargains as well as good ones.
 Exceptions:
 If inadequacy of consideration is apparent to
disguise a gift into a contract it can not be enforced.
 Nominal consideration is generally not recognized
by courts unless it was, in fact, truly bargained for.
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Consideration
 There is a valid consideration if there is:
1. A bargained for exchange
2. Of a promise, act or forbearance
3. That had legal value
-not preexisting duty
- not past consideration
- not illusory promise
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Consideration
4. A recognized exception
- Promise to perform preexisting contractual
duties or unforeseen difficulties
- Accord and satisfaction of an unliquidated
debt
- Past consideration recognized as a moral
obligation

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Capacity to Contract
 The law uses the word capacity to describe the
ability of a person to do a legally valid act.
 Three major classes of persons are given are given
this special protection in their contractual relations
with others:
1. Minors
2. People who are mentally impaired &
3. Intoxicated persons

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Capacity to Contract
 If either party entering a contract lacks
capacity to contract, the contract is void or
voidable, depending upon the kind of
incapacity involved.
 Capacity to contract, however, is presumed,
which means that the party which claims
incapacity must prove it.

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Capacity to Contract
 Minors’ Contracts
 The idea behind minors’ incapacity is that a minor
may not be able to bargain effectively with older
more experienced persons.
 The minor, thus, is given the right to disaffirm
(cancel) his or her contract.
 Since the idea is to protect the minor, only the minor
can disaffirm; adults who contracts with minors are
bound by the contract unless minor chooses to
disaffirm.
(CASE: Mitchell vs. Mizerski 1995 pg. 173)

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Capacity to Contract
 Ratification: Minors may disaffirm their contracts at any
time during their minority, and for a reasonable time after
attaining majority.
 If the minor’s contract involves title real estate, the minor
cannot disaffirm until reaching majority.
 The minor who does not disaffirm within a reasonable time
after attaining majority is held to have ratified the contract
and thereafter loses the right to disaffirm. Any words or
conduct on the part of a minor after reaching majority that
clearly indicates an intent to be bound by the contract are
enough for ratification.

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Capacity to Contract
 In case of misrepresentation of age by a minor
which is proven by the adult of such a contract,
theoretically, the minor’s right to disaffirm remains
unaffected.
 In reality, however, the minor who misrepresents his
or her age is not allowed to defraud adults by doing
so.
 In case an adult proves that the contract is for
necessaries (food, clothing, shelter, medicine etc.), it
can be disaffirmed by the minor but he/she is held
liable for reasonable value of necessaries used.
(REFER: Figure 11-3 Minors’ right to Disaffirm pg. 178)
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Capacity to Contract
 Like minors, people suffering from mental
impairment can lack the capacity to contract, thus
rendering the contract voidable, at the election of
that person or his/her guardian or administrator.
 Incapacity may mean insanity, mental illness, brain
damage, retardation, senility or in some cases
intoxication.
 There are a few exceptions:
-If adjudicated insane, contract is void
-Contract for necessaries
-Contract is ratified on regaining capacity

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Voluntary Consent
 A contract is a voluntary agreement between the parties;
this is the basis of contract law
 Even if the circumstances surrounding a case indicate that the
parties reached an agreement, that agreement must be
voluntary to be enforceable
 Law recognizes several kinds of behavior that could operate
to take away a person’s ability to freely enter into a contract:
 Misrepresentation
 Fraud
 Duress & Undue influence
 Mistake

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Voluntary Consent
 The Parties’ Duty to Care
 The laws regarding voluntary consent are designed to protect a party to a
contract from innocent errors on his own part and from unacceptable
behavior by the other party to the agreement. A person should use
reasonable care to discover everything relevant to the contract.
 The Remedy
 A contract lacking voluntary consent is voidable. The injured party may
rescind (cancel) the contract. Both the parties return what they received.
If there was no performance the injured party may notify that he/she
disaffirms. The defense is lack of voluntary consent.
 Ratification
 One who waits too long to complain has indicated satisfaction with the
agreement despite the initial lack of true consent.

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Voluntary Consent
 Misrepresentation: any party to the contract creating in the
mind of the other party a mistaken impression about an
important fact or facts concerning the subject of the contract.
 Acting in reliance on this mistaken belief, the victimized
party entered into a contract he or she would not otherwise
have entered if the full truth had been known.
 Knowledge of Falsity
 Materiality
 Fact versus Opinion
 Justifiable reliance
(Separu vs. Ford Motor Company 1995 pg. 187- Sarnifil Inc. vs. Peerless
Insurance Co. 1994 pg.188)

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Voluntary Consent
 Fraud: is intentional misrepresentation. To prove fraud, one
must prove all the elements of misrepresentation plus two
additional elements- (1) knowingly made with the (2) intent to
deceive (technically called scienter)
 The courts generally infer an intent to deceive from the fact that the defendant knowledge
made a misstatement to a plaintiff who was likely to rely on it.
 Fraud by silence- the common law position remains that of caveat emptor (buyer
beware), however, many courts today recognize that it often produced unfair
results.
 Fraud in execution- involves misstatements about content or legal effect of
something usually contained in a form or preprinted contract. If the signer of such
a document is either prevented/discouraged/or had trusted relationship resulting in
not knowing the facts is being deceived (fraud).
 Remedy for Fraud- the party can rescind the contract or a defrauded buyer can
also affirm the contract and sue in tort for damages.
(Stambovsky vs. Ackley 1991 pg. 191- Figure 12-3 pg.192)

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Voluntary Consent
 Duress & Undue Influence: these are terms used to describe situations in
which one party to an agreement interfered with the other party’s ability
to resist entering into the agreement.
 The basic idea of duress is that one of the parties, by making some threat
of harm, forced the other party to enter an agreement he/she would not
otherwise have entered.
 Undue influence is closely related to duress but it exists only when the
parties had some confidential relationship at the time of the contract.
 Contracts made under duress and undue influence are voidable because
the injured party has been deprived of the ability to make a free choice.
 Their promise is not voluntary as required by contract law.
(CrossTalk Productions, Inc. vs. Jacobson 1998 pg. 194)

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Voluntary Consent
 Mistake: the term is used in contract law to describe the
situation in which one or both the parties to an agreement
acted under an untrue belief about the existence or
nonexistence of a material fact.
 In mistake cases unlike fraud or misrepresentation cases in
which the victim is also acting under a mistaken belief about
the facts, the mistaken belief is not a product of a
misstatement by the other party.
 Mistake in this sense does not include errors of judgment,
ignorance, or a party’s mistaken belief that he/she will be
able to fulfill certain obligations under a contract.
 Mistakes prevent the ‘meeting of minds’.
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Voluntary Consent
 Mistakes can be mutual or unilateral.
 Mutual mistakes are always a basis for granting rescission of
the contract at the request of either party. Clearly no meeting
of minds took place so no contract. (e.g. pg.196)
 Unilateral mistakes are committed by one party acting under
a mistaken belief. This can not be a ground for rescission,
however, it appears that courts have often granted rescission
if they are convinced that a person was truly mistaken and
that a serious injustice would result. (figure 12-5 pg.197)

(Wilkin vs. 1st Source Bank 1990 pg.196)

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Illegality
 Even if the parties to an agreement have met every other
requirement for a valid contract, their contract is
unenforceable if either its formation or its performance is
illegal or contrary to public interest.
 An agreement is illegal if it calls for behavior that violates
a statute or a rule of common law.
 An agreement that is contrary to a general rule of public
policy is also illegal.
 A court will not enforce illegal agreements. No recovery will
be allowed. As a rare exception, only if it is proved that both
the parties were ignorant of the facts that made a bargain
illegal, there is possibility of recovering as much as was
needed for performance till then.
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Illegality
 Public policy is best served by any rule that encourages people not to
commit illegal acts.
 To encourage such people to cancel illegal agreements, the courts allow
one who rescinds the contract before any illegal act has been performed
to recover any consideration given (example paragraph 1 pg. 204-sale of
trade secret).
 A contract can call for the performance of several promises, some legal
and some illegal. If the contract is divisible –that is, if legal part can be
separated from the illegal parts- the courts enforce the legal parts of the
contract (example pg.204 & 210-ban for competition).
 A contract is illegal and hence void if it is:
1. To commit illegal acts
2. Made illegal by Statute (wagering statutes etc.)
3. Contrary to public policy

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The Form and Meaning of Contracts

 Oral contracts are, as a general rule, equally binding

and enforceable as are the written contracts.
 There are, however, some exceptions to this rule.
 Depending upon a statute a contract is required to be
written for becoming enforceable, for example
statute of frauds in the U.S. (lists areas under which there
is higher possibility of fraud and thus require a written
agreement) and property related contracts in the UAE.
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The Form and Meaning of Contracts
 Even if a contract that is not required to be written it is more
desirable than oral contracts for several reasons such as:
1. The parties are less likely to misunderstand the terms of
their agreement if they have reduced it to written form.
2. If a dispute about the parties’ obligations should arise at a
later date, the written agreement is a better evidence.
3. The existence of a written agreement may provide
protection against intentional misstatements about the terms
of the contract.
 Parties to a written contract should make it complete and as
unambiguous as possible.

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Third Parties’ Contract Rights
 There are two kinds of situations in which persons
who were not originally parties to a contract may
claim some interest in it:
1. Assignees
2. Third party beneficiaries
 A contract consists of both rights and duties. A
contracting party has the duty to perform his/her
own promise and the right to receive the other
party’s promised performance.
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Third Parties’ Contract Rights
 The rights and duties can usually be transferred to third persons.
 When rights under a contract are transferred, this is called an
assignment.
 The transfer of duties is called delegation.
 The person who makes an assignment is called the assignor, and the
person who accepts the assignment is called the assignee.
 After an assignment, the assignee is entitled to whatever performance
the assignor had a right to under the original contract. (See figure 15-
2 pg. 235)
 No particular formalities are required to create an assignment. It can
be done orally or in writing, so long as the assignors intent to assign is
clear.
 In addition consideration is generally not required.
 Rights can be given away as well as sold.
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Third Parties’ Contract Rights
 Not all contracts are assignable
 Any assignment that would materially alter the duties of the
promisor is unenforceable. (Peterson Case pg.233 &236)
 Contracts involving personal rights are also generally not
assignable. These are contracts in which some element of
personal skill, credit, character or judgment is an essential
part of the agreement.
 Assignments contrary to public policy are also not effective.
 An assignee is entitled to all the rights his assignor had under
the assigned contract, including the right to promisor’s
performance.

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Third Parties’ Contract Rights
 Generally, those who are not parties to the contract have no
rights in the contract even though they may benefit from its
performance
 If the parties to a contract intended to benefit a third party,
however, the third party can enforce the contract
 There are two classes of third party beneficiaries that have
such enforcement rights:
1. Donee beneficiaries
2. Creditor beneficiaries
(A possible incidental beneficiary, not intended to be beneficiary, can
not enforce it)

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Third Parties’ Contract Rights
 A third person is a donee beneficiary if the promisee’s
primary purpose in contracting was to make a gift of the
contracted performance to the third party, who too can sue
the promisor for non performance. (Figure 15-3 pg. 240)
 If the promisor’s performance will satisfy a legal duty that
the promisee owes a third party, the third party is a creditor
beneficiary. The creditor beneficiary has rights against both
the promisor and the promisee. ( figure 15-4 pg 241)
 Incidental beneficiaries cannot enforce rights even though
they benefit from another’s contract. Members of the general
public are usually incidental beneficiaries of governmental
contracts of goods and services.
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Performance and Remedies
 Contracts are legally enforceable agreements. Thus if an
agreement meets all the requirements/elements of a contract
it is enforceable.
 If a dispute arises between the parties to a contract several
questions regarding duties of the parties may be raised:
 Are there any conditions in the contract?
 If so, have these conditions been met?
 Have the parties completed the duties or there is a material breach of
such duties?
 Has any party some legal excuse for not performing?
 Has this duty been discharged in any way?
 Even if one of the parties has materially breached the
contract, a dispute may arise about the available remedies.

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Performance and Remedies
 Conditions: Generally a party’s contractual duty to perform
arises at the time the contract is formed. The parties may,
however, provide that a party’s duty to perform is qualified
by the happening of some event, or condition. (examples
pg.247)
 Types of Conditions:
1. Condition precedent
2. Condition subsequent
3. Concurrent conditions
 The creation of conditions:
1. Express conditions
2. Constructive (implied) conditions

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Performance and Remedies
 Standards of Performance: A common source of dispute between
contracting parties is whether the parties have fulfilled their duties of
performance under the contract. The courts have attempted to create
practical, commonsense standards for evaluating the parties’
performance.
 They recognize three basic degrees of performance:
1. Complete or Satisfactory Performance- Promisors who completely
perform their duties are entitled to receive full contract price in return.
2. Substantial Performance- is performance that falls short of complete
performance in minor respects but does not deprive the promisee of a
material part of the consideration that was bargained for.
3. Material Breach- The promisor is guilty of material breach if his/her
performance fails to reach the degree of perfection the other party is
justified in expecting under the circumstances, such a promisor is liable
for damages.

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Performance and Remedies
 Excuses for Nonperformance: Promisors who fail to perform
satisfactorily may be able to avoid liability for breach of contract if they
can show some legal excuse for their failure.
1. Prevention of performance: A promisee who causes the promisor’s
failure of performance cannot complain about the failure. Promisee
owes a duty of cooperation to promisor and if this delays or hinders the
performance relieving the promisor of further performance.
2. Impossibility: If it becomes impossible for a promisor to perform
his/her contractual duties, the duty to perform is discharged and the
promisor is not liable for material breach of duty.
 Incapacitating Illness or Death of Promisor in a personal service
contract
 Intervening Illegality
 Destruction of Subject Matter
 Commercial Impracticability or Commercial Frustration

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Performance and Remedies
 Discharge: Parties who have been released from their
obligations under a contract are said to be discharged.
Normally both parties to a contract are discharged when they
have completely performed their contractual duties. There
are, however, several other possibilities for a discharge, these
are in addition to what ever discussed so far, e.g. conditions
precedent, subsequent, concurrent etc.
 Discharge by agreement
 Discharge by waiver
 Discharge by alteration
 Discharge by limitations (delay as per statue/time barred)

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Performance and Remedies
 Remedies: If a party does not perform as promised under a
contract, and performance has not been excused or
discharged, then the other party is entitled to a remedy for
breach of contractual promise. The remedy tries to put the
injured party in the same position he/she would have been if
the contract had been performed. If the loser does not pay
he/she can enforce the judgment by writ of execution.
 Compensatory Damages
 Consequential Damages
 Nominal Damages
 Liquidated Damages
 Punitive Damages

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Performance and Remedies
 Equitable Remedies: If the legal remedies
for breach of contract (usually money
damages) are not adequate to fully remedy a
party’s injuries, a court has the discretionary
right to grant an equitable remedy.
 Specific Performance (mostly in Real Estate
Cases)
 Injunctions
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Sales:
Formation & Terms of Sales Contracts
 The sale of goods is the transfer of ownership of
tangible property in exchange for money, other
goods, or the performance of services.
 Laws of Sales of Goods are, for all practical
purposes, an extension to the Contract Law. Thus all
elements of a contract have to be present in the
contract of any sales of goods.
 As separate from the contract law, though, in most
cases the Law of Sales of Goods includes only sales
of movable goods/property.
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Sales:
Formation & Terms of Sales Contracts
 In sales the title passes to the buyer when the seller has completely performed
his/her duty concerning physical delivery of goods.
 Transportation of goods from seller to buyer is a risky business. There is
possibility of loss or damage to goods in transit for various reasons.
 Usually the risk of such loss has to be covered by the agreement itself by either
specifying clearly or by accepting commonly used shipping terms.
 Law can also provide specific rules to govern that risk by fixing responsibility to
the party that is best able to protect the loss.
 Shipping Contracts
1. F.O.B. (Free on Board- free of expenses)
2. C.I.F. (Cost, Insurance, Freight by seller)
3. C & F (Cost & Freight only)
 Destination Contracts
1. FOB Destination (with risks till delivery of seller)
2. Ex-Ship (seller until unloaded from ship)
3. No Arrival – No Sale

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Sales:
Warranties & Product Liability
 In general, a warranty is a contractual promise by
the seller regarding the quality, character or
suitability of the goods sold.
 If the seller through words or behavior, makes
promises about the goods, he has created an Express
Warranty. The critical elements for creation of an
express warranty are that the seller make a statement
of fact or a promise to the buyer concerning the
goods that become part of the bargain between buyer
and seller.
 Example pg. 283,
 Case: Cipollone vs. Ligget Group Inc. 1990)

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Sales:
Warranties & Product Liability
 In addition law imposes certain responsibilities for the quality of goods
sold, on the seller. These warranties arise whether or not the seller has
made express promises. The warranties imposed by law are known as
Implied Warranties.
 Implied warranties imposed by law are not absolute. They arise only
under certain circumstances, and the seller may include a clause in the
contract that excludes them.
 There can be two implied warranties of quality:
1. Implied Warranty of Merchantability - Goods are fit for the ordinary
purpose for which these goods are used (e.g.. Pg. 285 Case-Denny vs. Ford Motor Co.
1995 pg.286).
2. Implied Warranty of Fitness for a particular Purpose – (Klein vs. Sears
Roebuck & Co. 1985 pg. 289)
 Implied Warranty of Title- Unlike in warranty of quality there can be an
implied warranty for title. In any contract of for sale of goods the sellers
warrants the buyer that he has the right to sell (Marino vs. Perna 1995 pg.290)

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The Agency Relationship-
Creation, Duties & Termination
 An agency relationship arises when one person (the agent) works on
behalf of and under the direction of another (the principal).
 Agency law especially focuses on the relations between principals &
agents and the third persons with whom agents deal in making contracts
on behalf of principals.
 Agency relationships are usually formed by contract, although they may
be found in the absence of a contractual agreement.
 An agency may be either written or oral and either compensated or
uncompensated.
 An agency results from any indication of consent by the principal that the
agent may act on the principal’s behalf and under her control.
Case: Lang vs. Consumers Insurance Service 1991 pg. 346,
Robert Hicks Case pg. 344

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The Agency Relationship-
Creation, Duties & Termination
 Creation of an Agency
 TEST- Is one party (agent) acting :
 For the benefit of and
 Under the control of another (principal)
 Evidence- Look at the parties’ words, actions, and the surrounding
circumstances.
 Formalities- Generally, none are required:
 No contract is necessary
 Agreement may be verbal
 Agent need not be compensated
 Capacity- No legal capacity necessary to sere as an agent (some
regulatory exceptions, incapacitated agent may avoid agency agreement)
1. Any person with legal capacity may be a principal
 Power- Agent may do any thing that the principal could do (with some
exceptions)

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The Agency Relationship-
Creation, Duties & Termination
 Duties of Agents to Principals: The duties of an
agent to the principal normally derive from either
the contract, if any, between them or from the
common law of agency. In case the contract is silent
on duties the following are the common duties:
1. Duty of loyalty
2. Duty to obey instructions
3. Duty to exercise care and skill
4. Duty to communicate information
5. Duty to account for funds and property

12/09/21 Business Law 55

The Agency Relationship-
Creation, Duties & Termination
 Duties of Principals to Agents: The
following duties are generally imposed on
the principal by the common law:
1. The duty to compensate
2. The duty to reimburse and indemnify
3. The duty to keep accounts


12/09/21 Business Law 56