Business Law 2 Contracts

Contract is an obligation of the parties on an
object and their commitment to it, and is the

expression of the connection between offer and
acceptance.
A contract has been defined as a legally binding
agreement. It is also defined as: A promise or a
set of promises which the law will enforce.
However not all promises or agreements can be
considered contracts.
The contract is concluded by the mere exchange
by the two parties of corresponding intents, with
due attention to specific issues which the law
may require. p. 290, Mallor et al, Business Law
1
The effect of contract is the constitution of an
obligation, because contract is one of the
sources of the obligation. However, the effect
of an obligation is the binding need to
execute it.
The Law of Contracts sorts out what promises
are enforceable, to what extent, and how
they will be enforced (Legal enforceability).
A person injured by a breach of contract is
entitled to call on courts (file a case) to force
the breaching party to honor the contract/
pay compensation.
2
Contracting creates a type of private law:
a contracting party is backed by the force
of the law not only the good faith of the
other party.
Contracting facilitates planning.
p. 290, Mallor et al, Business Law
3
CLASSIFICATIONS OF
CONTRACTS
pp. 294-295, Mallor et al, Business Law

a) Unilateral and bilateral (or
multilateral):
Unilateral contracts: One party makes a promise.
Bilateral contracts: Both parties exchange
promises.
b) Valid, voidable and void:
Valid contracts: meet all requirements and are
therefore enforceable in court.
Voidable contracts: one or more of the parties have
the legal right to cancel their obligations; e.g. the
right of the injured party to cancel a contract
induced by duress or fraud. Contracts made by
persons without a proper right of representation, or
contracts made by minors fall into this category.
5
Void contracts: arrangements that create
no legal obligation and no remedy will be
given. Due to the lack of the essential
elements, we can say that there was
never a contract. Any goods or money
obtained under the agreement must be
returned.
6
c)Enforceable and unenforceable
contracts:
Unenforceable contracts: meet all requirements
but are not enforceable because of another
legal rule e.g. if barred by applicable statute of
limitations.
d) Express and implied contracts:
Express contracts: Parties have directly stated
the terms of their contracts.
Implied contracts: Surrounding facts and
circumstances indicate (and the court infers)
that an agreement exists.
e) Executed and executory:
Executed contracts: When all of the parties
have executed their obligations.
Executory contracts: A contract is executory
until all of the obligations are fully performed.
7
Types of Contracts: a) Specialty contracts;
b) Simple contracts:
a) Specialty contracts: Formal
contracts also known as deeds. They have
to be in writing and signed in front of
witnesses and attested.
Attestation is a statement that the deed has
been signed in the presence of a witness.
b) Simple contracts: Contracts which
are not deeds are known as simple
contracts. They are informal contracts and
may be made in any way: orally, in writing
or they may be implied from conduct.
8
Negotiated and standardized contracts:
There are negotiated contracts and
standardized form contracts preprinted
and presented to the other party for
signing.
The party who drafts and presents the
standardized contract has more
bargaining power and/or sophistication.
9
The elements that make a contract valid are:
(1) Agreement (genuineness of consent -
voluntary agreement of offer and
acceptance);
(2) Consideration,
(3) Intention to create legal relations;
(4) Form;
(5) Capacity of contracting parties;
(6) Legality of objectives and performance.
A contract which possesses all these
requirements is said to be valid. The absence of
any of these essential elements may turn the
contract into: void, voidable or unenforceable.
10
An agreement is formed when a party
accepts the offer of another. Therefore, in an
agreement we have two important
components:
a) The Offer;
b) The Acceptance.
The first requisite of any contract is an
agreement. At least two parties are
required; one of them, the offeror, makes an
offer which the other party, the offeree,
accepts.
11
An offer is a proposal made on certain
terms by the offeror together with the
promise to be bound by the proposal if
the offeree accepts the stated terms.
An offer is an expression of willingness
which will become legally binding once it
is accepted, and acceptance is the
agreement to all the terms in the offer.
It is important to identify when a true
offer has been made because once it is
accepted the parties are bound.
12
Requirements of an Offer:
i) Objective indication of a present intent
to contract on the part of the offeror.
ii) Definitiveness in the terms of offer.
iii) Offer must be communicated by the
offeror to the offeree.
A real offer must be distinguished from
what is known as an Invitation to treat.
13
Invitation to treat: This is when a person
or business stays in a position that shows
that he is ready to receive offers. For
example, when we go to a shop which has
an offer of a product, we know that in
fact they are not making an offer, what
they are doing is inviting you to make an
offer for that product.
Examples of invitations to treat:
i) The display of goods without a price
ticket attached in a supermarket or in a
shop window.
14
ii) Advertisements, catalogues and brochures:
It includes adverts in TV, radio, magazines,
internet, etc.
iii) Company prospectuses: When a company
wishes to sell shares to the public.
iv) Auctions: The call for bids by an auctioneer
is an invitation to treat. The bids are offers.
v) Tenders: Some companies or governments
place contracts by inviting interested firms to
tender (to offer) for business.
vi) Statements of price in negotiations for the
sale of land: the courts are reluctant to find a
definitive offer to sell unless it is very clearly
stated.
15
An offer can end in a number of ways: i)
By acceptance; ii) By rejection; iii) By
revocation before acceptance; iv) If the
offer lapses; v) Death; vi) Failure of a
condition attached to the offer.
i) By acceptance: An offer which has been
accepted constitutes a contract.
16
ii) By rejection: An offer is rejected if: (a) The
offeree notifies the offeror that he does not wish
to accept the offer; (b) The offeree says that he
accepts the offer under certain conditions, (c)
The offeree makes a counter offer.
However, a request made by the offeree to the
offeror requesting for more information about
the offer cannot be taken as a rejection of the
offer.
iii) By revocation before acceptance: An offer
may be revoked (withdrawn) at any time
before acceptance but it will only be effective
when the offeree is aware or knows about the
withdrawal of the offer; but if someone has
started to perform the act requested in the
offer, the offer cannot be revoked.
17
iv) If the offer lapses: The offeror may
stipulate that the offer is only open for a
limited period of time. Once the time limit
has passed, any acceptance will be invalid.
v) Death: If the offeror dies after having
made an offer and the offeree is notified of
the death, any acceptance will be invalid.
vi) Failure of a condition attached to the
offer: An offer may be made subject to
conditions. If the condition is not satisfied
the offer is not capable of being accepted.
vii) By illegality or destruction of the subject
matter
18
Cross Offer:
Two offers which are similar in all
respects made by parties to each other,
without knowing each others offer
Example: Ali sends a letter by post to
Omar offering to sell his car. On same
day, Omar also post Ali a letter offering to
buy his car
19
Once the presence of a valid offer has
been established, the next step in the
formation of an agreement is to find an
acceptance of that offer.
Acceptance is a manifestation of the
assent to the terms of the offer made by
the offeree in the manner invited or
required by the offer.
20
i) The offeree intended to enter the contract.
ii) The offeree accepted the terms proposed
by the offeror.
iii) The offeree communicated his
acceptance to the offeror.
iv) The acceptance must be made while the
offer is still open (within the contractual
session). It must be absolute and
unqualified.
21
Unconditional acceptance: If the offeree tries
to change the terms of the offer, this is a
counter offer, therefore it is a rejection of the
original offer.
One form of conditional acceptance is the
use of the phrase subject to contract,
mainly used in negotiations involving the
sale of land; these words usually mean that
the parties do not intend to be bound at that
stage. The advantage of subject to
contract agreements is that they allow
either party to withdraw from the agreement
at any time.
22
An acceptance may take any form. It
can be given orally or in writing but
silence cannot normally amount to an
acceptance.
An offeror may state that the
acceptance must be in a particular
form; and the wishes of the offeror
should be respected; so if the offeror
asks for an acceptance in writing it
must be done in that way or else it
will not be valid.
23
The general rule is that acceptance
must be communicated to the
offeror, either by the offeree
himself, or by someone authorized
by the offeree. The contract is
formed at the time and place the
acceptance is received by the
offeror.
24
The most basic requirements of a contract are
the presence of an agreement. The agreement
may be invalidated by a number of factors:
Factors that invalidate an agreement:
(1) Mistake;
(2) Misrepresentation;
(3) Duress (agreement done by force or
threat);
(4) Undue Influence;
(5) Fraud.
25
Mistake is a belief about a fact that is not in
accord with the truth.
Types of mistakes:
(a) Common mistake: Both parties make the
same mistake. The parties have entered into
an agreement on the assumption that a
certain states of affairs exist but
subsequently they both discover that they
were wrong.
A common mistake will invalidate the
contract in the following situations:
i) Mistake of law: It is assumed that
everyone is presumed to know the law.
26
ii) Mistakes as to the existence of the
subject matter of the contract.
iii) Mistake as to title: When the parties are
mistaken about the ownership of the
subject matter of the contract.
(b) Mutual mistake: When the parties are
at cross purposes; for example, A offers to
sell his car to B; the offer is accepted by B
thinking that A wants to sell his Toyota, but
A is referring to his other car, which is a
Jaguar. The court will consider objectively if
there is an agreement or if the
misunderstanding is so big that it is
impossible to find an agreement at all.
27
(c) Unilateral mistake: Only one of the
parties is mistaken and the other party
either knows or is assumed to know
that a mistake has been made.
Generally, a unilateral mistake does not
invalidate a contract. However, if there
is a fundamental mistake as in changing
the subject matter of the agreement,
the court may consider that the
contract is void.
28
(d) Mistake as to the terms of the
contracts: This is when one party makes
an offer to another party and he is aware
that the other party is fundamentally
mistaken about the terms.
(e) Mistake about the identity of one of
the parties: If one party makes a mistake
about the identity of the person he is
contracting with, this may invalidate the
contract on the basis of unilateral
mistake.
29
The formation of a contract is often preceded
by a series of negotiations between the parties.
Some of the statements made during the
negotiations may later turn out to be false.
A Misrepresentation is a false statement made
by one party which induces the other to enter
into a contract.
Silence cannot be taken as a
misrepresentation, but there are certain
situations where a failure to speak will amount
to an actionable misrepresentation:
i) In a good faith relationship between partners,
ii) contracts of utmost good faith; e.g. proposal
for insurance cover,
30
iii) When a half truth is covered,
iv) when there has been a change in
circumstances between the time of
negotiations and the conclusion of the
contract.
The misrepresentation must involve a
statement of fact, opinion or intention:
An opinion will not be taken as
misrepresentation because an opinion is a
statement of belief which is not capable of
proof; but if this opinion is coming from a
person who is in a position of expertise in
the subject; his opinion could be an
actionable misrepresentation.
31
Types of misrepresentation and their
effects:
a) fraudulent misrepresentation;
b) negligent misrepresentation;
c) innocent misrepresentation:
(a) Fraudulent misrepresentation: A
person will be liable for fraud if he makes
a statement which he knows to be false
or he has no belief in its truth or he is
reckless, careless whether the statement
is true or false.
32
(b) Negligent misrepresentation: When the
person making the false statement has no
reasonable grounds for believing the
statement to be true.
(c) Innocent misrepresentation: An
innocent misrepresentation is when a
person made a false statement thinking
that what he was saying was true.
- Rescission: Rescission is to make a
contract no more valid. Rescission aims to
restore the parties to the position where
they were before the contract. Money or
goods which have changed hands must be
returned.
33
A contract will be valid only if the parties
entered into it freely and voluntary. When
a party to a contract is subject to
violence or threats of violence, and has
no reasonable alternative but to enter the
contract, the contract may be avoided on
the grounds of duress. The court also
recognizes economic duress.
34
Economic duress: Wrongful or unlawful
conduct that creates fear of economic
hardship which prevents the exercise of
freedom while engaging in a business
transaction. When one of the parties
occupies a position of dominance and
influence over the other, there is a
relationship under pressure from one party
over the other. The contract will be void
unless the dominant person can show that
the other party acted independently and
without pressure.
35
Undue influence is unfair persuasion, it
involves wrongful pressure exerted on a
person during the bargaining process.
However, the pressure is exerted through
persuasion rather than through coercion.
36
Fraud is a false statement of material fact
that was knowingly made by one party to
the contract with intent to induce reliance
by the other (intent to deceive).
Hence, the injured party has to prove that
the fact asserted was material or that the
assertion was fraudulent. Once proved,
the injured party may seek to rescind the
contract and/or claim damages.
37
The agreement alone does not make a
contract. The element of exchange,
known as consideration, is an essential
element of every valid simple contract.
It is a benefit or right for which the
parties to the contract must bargain.
A more precise definition is:
Consideration is legal value, bargained
for and given in exchange for an act or a
promise.
38
Considerations can take two forms: executed
and executory:
a) Executed considerations: When a promise is
made in exchange for an act, when that act is
performed, it is executed consideration. It is when
one party promises to do something in return for
the act of another.
b) Executory considerations: Is when there is an
exchange of promises to perform acts in the
future.
Consideration must not be in the past: If one
person performs an act and the other person
makes a promise after the act was performed,
the consideration is said to be in the past. Past
consideration is regarded as no consideration.
39
Consideration must move from the
promisee: If A (the promisor) makes a
promise to B (the promisee), the promise
will only be enforceable if B can show
that he has provided consideration in
return for As promise. The promise will
not be enforceable if B cannot show the
consideration, unless the promise is
made in the form of a deed.
Consideration must not be illegal: The
courts will not entertain an action where
the consideration is contrary to a rule of
law or is immoral.
40
Consideration must be sufficient but may
be not adequate: Sometimes the price of
the consideration may be of little value or
even the value of AED 1 may be taken as
a symbolic payment to prove the
transaction. The contract is valid, and it
does not fail for lack of consideration; we
can say that the consideration was not
adequate but it was sufficient. The court
will not help someone who complains of
making a bad bargain.
41
For a binding contract, the law demands that
the parties have the intention to enter into a
legal relationship. Objective standard of
intent: intent of the offeror will be judged by
an objective standard i.e. what his words,
acts and circumstances signify about his
intent.
For the purpose of establishing this intention,
agreements are divided into two categories:
a) Business/commercial agreements;
b) Social/domestic agreements:
42
a) Business/commercial agreements: It is
automatically presumed that the parties
intended to make a legally enforceable contract.
However, when the parties enter into an
agreement subject to contract they are
expressly stating that they will not be bound
unless and until a formal contract is written and
signed.
There are situations where it would appear that
the parties had entered into a commercial
arrangement but nevertheless a contract is not
created. These situations are: a) Collective
agreements, b) Advertisements, c) Public
bodies, d) Letters of comfort, e) Letters of intent.
43
i) Collective agreements: The agreements
between employers and trade unions regarding
payments and employment conditions are not
intended to be legally enforceable unless they
are in writing, meaning that what was verbally
agreed must be properly documented in writing
and signed.
ii) Advertisements: Generally speaking, vague
promises or guarantees given in the course of
promoting a product are not intended to be
taken seriously.
iii) Public bodies: When one party is a public
body which is bound to supply a particular
service, there is no intention to enter into an
agreement.
44
iv) Letter of comfort: Informal letter from
a person or organization (e.g. a bank)
indicating its willingness to support a
customer with a short term loan, if and
when required. It is not a letter of
commitment. It can also be defined as a
document supplied by a third party to a
creditor indicating a concern to ensure
that the debtor meets his obligations to
the creditor.
45
v) Letters of intent: A letter of intent is
when one person indicates to another that
he is likely to place a contract with him but
the binding will exists under certain
circumstances. The best example is when a
person is preparing a tender and he has to
plan the cost of the work; he can call
another sub-contractor for some specific
work, for instance, a carpenter to do some
of the works for the construction; in this
example, the persons who is preparing the
tender can arrange with the carpenter In
case I win the tender, I will contract you for
the carpentry work..
46
b) Social/domestic arrangements:
Social arrangements between friends are
not seen as contracts because the parties
never intended their agreement to become
legally binding, for example, an agreement
to meet for lunch or an invitation to a
party. But if the agreement had a
commercial purpose, the court may be
prepared to find the necessary intention of
the contract. Most domestic arrangements
within families are not intended to be
legally binding, but it does not mean that
there can never be business contracts
between members of a family.
47
If you ask someone what a contract is, you will
probably be told that it is a written document.
Some contracts are indeed in writing but the
majority are created much more informally
either orally or implied from conduct.
Generally, the law does not require complex
formalities to be observed to form a contract;
however there are some types of contracts in
which some formalities are necessary to make
the contract valid. For example, bills of
exchange, cheques and promissory notes,
transfer of shares in a limited company,
contracts of employment, and a contract of
guarantee have to be in writing.
48
Capacity means the ability to incur legal
obligations and acquire legal rights.
Normally, a contract in which one or both
parties lack capacity because of infancy,
mental impairment, or intoxication is
considered to be voidable.
There are some groups of people who are
in need of the laws protection either
because of their age or because of their
inability to appreciate their own actions.
These groups are: a) Minors (under 18
years old), b) Mental patients and drunks.
49
a) Minors: A minor is free to enter into
contracts and enforce his rights against an
adult. The adults rights will depend on the way
in which the contract is made.
Valid contracts with minors: There are two
types of contracts which will bind a minor:
i) Contracts for necessary goods, ii) Beneficial
contracts of service.
Necessary goods are those goods suitable to
the condition of life of a minor. Luxury goods
are excluded; it means that if the minor buys
goods that are classified as necessary goods
the minor is bound to the contract and must
pay for them.
50
Contracts that provide education or involve
the learning of a profession are taken as
beneficial service for the minor and the minor
is bound to this contract.
If the minor has a business contract he
will not be bound by his trading, but the
adult dealing with the minor will be bound
to the terms of the contract.
Voidable contracts with minors: There
are three kinds of contracts which are
voidable when dealing with minors: i)
Leases of land, ii) Partnerships, iii)
Purchase of shares.
51
When the contract involves some kind of
wrongdoing, it will be illegal. If, however,
the conduct is neither immoral nor
blameworthy, but simply undesirable, the
contract will be void.
52
Illegal Contracts: a) Contracts to
commit crimes or civil wrongs; b)
Contracts involving immorality; c)
Contracts tending to promote
corruption in public life (bribes to
officials, public servants or even in the
private sector); d) Contracts trading
with an enemy in wartime; e)
Contracts directed against the welfare
of friendly foreign state; f) Contracts
prejudicial to the administration of
justice.
53
Consequences of illegality: A contract
which is illegal from the beginning will be
void and unenforceable. Some contracts
are innocent at the beginning but
become illegal because of the intentions
of one of the parties. The innocent party
will protect his rights if he repudiates the
contract as soon as he is aware of the
illegality.
54
Void Contracts: There are three types of
contracts in this category:
a) Contracts that remove the jurisdiction of
the Court: A contract which has a clause that
prevents the intervention of the Court in
case of dispute is a void contract.
b) Contracts prejudicial to the status of
marriage: This includes a contract that
restrains or controls a person from marrying
at all or except to one person.
55
c) Contracts in restraint of trade: In
general, a person is free and has liberty
to carry on his business, trade or
profession; and any contract that
restrains this right is considered void.
However, there are certain situations that
this right of freedom of trading is limited
and the law accepts these restrains.
56
Four main types of restrains for freedom of
trading:
a) A term in a contract of employment:
Which restricts an employees freedom of
conduct either during the period of
employment or after the employment has
terminated; e.g.: employees that signed a
full time contract with a clause that
prevents the employee to perform private
business; a contract with an employee
who knows certain secret processes for the
manufacture of a product, etc. The court
will accept the restrictions which are
reasonable in the circumstances.
57
b) A solus agreement by which trader
agrees to restrict his orders from only one
supplier.
c) A contract for the sale of a business by
which the seller agrees not to compete with
the buyer.
d) Contracts between traders to regulate
prices.
58

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Business Law 2 Contracts

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Contract is an obligation of the parties on an

object and their commitment to it, and is the

pp. 294-295, Mallor et al, Business Law

p. 291, Mallor et al, Business Law

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