LEGAL ASPECTS OF A BUSINESS

CONTRACTS
CONTRACT

An agreement

An agreement is made when two parties consent to something. An agreement is not legally
binding.

A contract

▪ A contract is a specific legal binding agreement between two or more

persons/parties in which there is an agreement to do something in return for a
benefit [consideration].

▪ A contract is enforceable by law- this means if the other party does not abide by the
contract, the other party may take legal actions.

PARTIES TO A CONTRACT

✔ Offeror- the person who made the offer

✔ Offeree- the person to whom the offer is made

Acceptor – the offeree who has accepted the offer

CHARACTERISTICS OF A SIMPLE CONTRACT

▪ The essential elements of the formation of a valid and enforceable contract are listed
below. A contract is void (has no legal effect whatsoever) or voidable [legally binding
but may be set aside by the court] if one or more of the following features are lacking

1. Offer and acceptance

2. Consideration
3. Legality
4. Competence of the parties/Capacity to contract
5. Genuineness of the consent of the parties
6. Possibility
7. Good faith

1. OFFER AND ACCEPTANCE

▪ A contract is formed when an offer has been unconditionally accepted. This means that
all terms of the agreement must be accepted by both parties.

The Offer

▪ This is an indication by one party to the other that they are willing to make a proposal and
to be legally bound by it.

Rules Governing an Offer

● The offer must be communicated to either a specific person or to the general

● public

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 ○ E.g. - Johnny offers to sell his skateboard to Tommy, this is an offer made to a
specific person
○ E.g. - Johnny advertises that the first person who comes to his house on a specific
date and time will be able to buy the skateboard, this is an example of an offer
made to the general public.

● An offer can be expressed in writing, oral or implied

○ E.g. - if you went to the dentist for some treatment, you are agreeing in principle
to pay for the treatment, if you are handed a bill and refuse to pay, you would be
in breach of a contract

● The offeror may attach any condition he/she pleases, but these conditions must be
brought to the offeree’s attention at the time the offer is made.

● The offer may be revoked at any time before acceptance, unless valuable
consideration has been given to keep the offer open for a certain time. Revocation of an
offer must be communicated to the offeree before he/she has accepted.

An offer lapses:

● when the stipulated time has expired or after a reasonable time.

● when it is rejected by the offeree.
● on the death of the offeror or offeree before acceptance but if acceptance happens
before the death of either party, contract is still valid.

● An offer by post is complete when it reaches the offeree. An offer lost in the post is
not an offer at all.

Acceptance

Acceptance

ii. Acceptance must be unconditional/unqualified.

The offeree cannot introduce a new term to the contract. E.g. if a seller offers a used car
for sale, you cannot say ‘I accept your offer on the condition that all tires are replaced’,
this is not acceptance, but you have created a counter offer. A counter offer revokes
the original offer. A counter offer occurs when an offeree responds to an initial offer
with a new offer, effectively rejecting the original offer

NB: a counter offer is when the offeree changes the terms of the agreement and it is
equal to the rejection of the original offer and is not legal acceptance. It is left up to
the offeror if he/she will accept the new terms presented by the offeree.

iii. Acceptance must be within an agreed time – however if no time period is stated, it must
be done within a reasonable period. (This is defined as that amount of time which is fairly
necessary, conveniently, to do what the contract requires to be done, as soon as
circumstances permit). An acceptance is final and irrevocable.

iv. Acceptance made through the post is effective once the letter is posted.
E.g. an acceptance letter lost in the post and which never reaches the offeror is still valid,
since a contract existed from the time of posting by the offeree.

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 Offer versus an Invitation to Treat

▪ An invitation to treat is not an offer, it is an intention to make an offer

▪ This is a situation where an offeror invites other parties to make him/her an offer

Examples of Invitation to Treat

✔ An auctioneer’s request for a bid

✔ goods on display in a shop or store with a price tag

✔ property advertised for sale

✔ an advertisement in the newspaper

2. Consideration

● Consideration is the benefit received by both parties either in the form of money,
goods or services etc. For example, a promise to dig someone’s garden in exchange
for repairs to a washing machine is a valid contract
● Consideration must be real, that is well defined, it should have some determinable value
(e.g. can be able to convert to cash)
● Consideration should be lawful since an unlawful act would be void [cannot be enforced
by law]

● Consideration must not be past: A benefit received in the past will not support a promise
made after the act or benefit is received. Past consideration is actually not regarded as a
valid consideration. Usually, consideration is provided either at the time of the creation of
a contract or at a later date, for example: Robert mows Mike's lawn and a week later
Mike gives a cheque for $2000. Robert's work is a valid consideration in exchange for the
cheque.

● Consideration may be either executed or executory

Executed is the action or price paid by one party in return for the act or promise of the
other party.

For Example: Richard loses his wallet and offers Bogdan a reward if he finds and
returns the lost wallet. It is only when Bogdan finds the wallet and duly returns it to
Richard that the reward becomes enforceable and the consideration becomes valid.

Executory: this is a promise by one party to perform an action in return of a

promise by the other party, at some future time.

Example: Omar promises to do some work in return for a promise of payment;

shopkeeper's promise to supply the goods and customer's promise to accept the
goods and pay. In the above examples, neither party has yet done any act but each
party has given a promise in order to obtain the promise of the other person. It
would be a breach of contract if either party withdrew from his/her promise without
the consent of the other.

3. Competencies of Parties [ Capacity of Parties]

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 ● Competencies of parties or capacity in law means that the persons are eligible to enter
into a contract. This means that only adults who are of sound mind and body not under
any influence whatsoever can enter into a contract.

● The following groups are not eligible to enter contracts: Minors (those less than 18
years) drunks, insane persons, prisoners. Exception to the rule:
Contract of necessaries: This looks at the rights of minors to enter into a contract for
those items that are necessary and suitable for their existence and or education. This
includes food, clothing, education and training.

Voidable contracts
Contracts with minors may be avoided by the minor(voidable), but if no steps are taken
to repudiate the contract during the time of their minority, or within a reasonable time
after reaching the age of majority, then they are binding and cannot be avoided
subsequently. The principle behind this rule is that if a minor enters into such a
contractual duty, it “remains until he thinks proper to put an end to it”

4. Legality

● All forms of contract must conform to the laws of the land. E.g. If Joe pays Michael $500
,000 to deliver a tonne of marijuana and Michael fails to carry out his side of the
agreement, then Joe cannot get the courts to force Michael to carry out his side of the
agreement.

● Illegal contracts include: contracts to commit wrongs, crimes or contracts involving

sexual immorality.

5. Possibility:

● Performance of the contract must be possible. Therefore, the act considered by both
parties must be deemed achievable within a reasonable time. If, however, the act is not
deemed achievable then the contract is discharged.

6. Genuineness of the consent of the parties:

● There must be a consensus between the parties to create legal relations. Additionally,
each party must enter into the contract of his/her own free will. There must not be undue
influence (duress), mistake or misrepresentation (innocent, negligent or fraudulent).

7. Good faith:

● A party to a contract expects that the other party will honestly and fairly carry out his or
her duties when the contract in formed, during negotiations and performance in the
manner acceptable

TYPES OF CONTRACT

A Simple Contract

▪ It may written, oral or implied by conduct

▪ Consideration is an important element in a simple contract

▪ Examples: Hiring a taxi, entering a store to purchase items,

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A Speciality Contract

▪ Speciality contracts are also called a deed or contract under a seal

▪ Speciality contracts apart from being written must be:

✔ Signed –signed by both parties

✔ Sealed – seal imprint is put on the document (stamped or sealed with an official
stamp as a symbol of authority
✔ Delivered – all the parties to the contract must have a copy of the document

▪ Examples: mortgage agreements, land or property sales, hire purchase agreement,

insurance

Contract of record:

Your turn- Research this type: Definition and examples

WAYS IN WHICH CONTRACTS MAY BE TERMINATED

▪ A contract may be discharged or terminated when one of the parties is released from their
contractual obligation.

Methods of Discharge or termination

▪ By breach- one party breaks the contract by failing to carry out its side of the agreement

▪ By agreement- both parties agree to cancel the contract before it is completed

▪ By performance- both parties carry out their side of the agreement

▪ By frustration or impossibility- one or both parties being unable to meet their obligations
because of circumstances out of their control
▪ Lapse of time- failure of a party to carry out its side of contract within reasonable time

▪ By renunciation – one party carries out a portion and fails to carry on any further

▪ By death – one party may die

▪ By bankruptcy – one party may become bankrupt

Breach of Contract

▪ Breach of Contract is a refusal of one party to fulfil the obligation/s of the contract

▪ When one party breaches a contract the innocent party is entitled to some form of
compensation.
▪ Where there is a breach of contract the innocent party must be paid for damages, that is,
compensation must be given to the innocent person in the form of cash

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Source:
https://ceopedia.org/index.php/Executed_consideration

Remedy for Breach of Contract

Specific Performance as a Contract Remedy

Specific performance is a type of remedy for breach of contract in which a court orders the
breaching party to perform their end of the bargain.

Monetary damages

Monetary damages are typically favored over specific performance as a remedy for breach of
contract. However, specific performance may be available when monetary damages won’t
adequately compensate you. For example, they may apply to a contract for something that is
unique and can’t be easily replaced.

Compensatory Damages in Contract Law

Compensatory damages refer to the financial compensation awarded to the innocent party in a
contract breach case. These damages aim to restore the non-breaching party to their original
position by covering any losses they have incurred.

Legal Injunctions in Contract Disputes

Injunctions serve a similar purpose as specific performance. The difference is that with specific
performance, the court orders a party to do something. With an injunction, the court often orders
a party not to do something.

Liquidated Damages in Contract Cases

Liquidated damages are a specific amount the parties agree to in the contract as compensation for
a breach.

Void contract

A void contract, as the name suggests, is a contract that is unenforceable from the outset. It lacks
legality and cannot be upheld by the law. Such contracts are considered null and void - as if they
never existed in the first place.

There can be specific situations in which a contract may be classified as void:

 Illegal activity – if a contract requires one or both parties to engage in illegal activities,
it’s automatically void (for example, a contract to sell stolen goods)

 Lack of capacity – when one of the contracting parties does not possess the legal
capacity to enter into a contract, the contract is void (a common example is when a party
is a minor, as minors cannot enter into legally binding contracts)

 Death of a party – if one of the parties to the contract passes away before the contract is
fulfilled, the contract may become void.

 Impossible to perform – if it becomes impossible to perform the terms of the contract

because of unforeseen circumstances, depending on the situation, the contract may be
considered void

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Void contracts aren’t enforceable. They’re considered null and void by law and the courts will
not intervene to enforce any of its terms. This serves as a fundamental principle of contract law,
ensuring that illegal or unenforceable agreements are not upheld.

Voidable contract

A voidable contract is a formal agreement between two parties that may be rendered
unenforceable for various legal reasons. These reasons include:

 Failure to disclose material facts – if one or both parties fail to disclose a material fact
relevant to the contract, it can render the contract voidable (for example, if a seller
deliberately conceals known defects in a product they’re selling, the buyer may have the
right to void the contract)

 Mistake, misrepresentation or fraud – a voidable contract may result from a mutual

mistake, misrepresentation or fraud (if a party is induced into the contract through false
information or deception, they may have the right to void the contract)

 Undue influence or duress – contracts entered into under undue influence or duress are
voidable (if one party exerts excessive pressure or influence on the other, it may
invalidate the contract)

 Unconscionable terms – contracts with terms that are considered unconscionable,

meaning they’re unreasonably one-sided or unfair, may be voidable

 Breach of contract – a breach of contract can lead to a contract becoming voidable if the
innocent party uses it as a means of ending the contract.

Unlike a void contract, a voidable contract is considered to be valid and enforceable.

However, it can be rejected by the party affected by the contract's defects. If the affected
party chooses not to reject the contract despite the issues, the contract remains valid and
enforceable.