Contract law's essential elements and legal implications

Law of Contract

Contract law

As to concerned definition of law there are many definition among various schools of thought of law such that no particular definition is acceptable to them as universal definition of law, but nevertheless there is a common acceptable definition as to what the law is composed of and that it is a collection of rules and regulations governing human conduct prescribed by human beings for the obedience of human beings. There are basically two concepts regarding law: general concept which is composed of the American society rules i.e. morals, norms or law of morality while law proper is composed of rules and regulations specifically enacted by the state through congress or other relevant authorities.

This essay basically focuses on different aspects of contract law and the impact it has on individuals and organizations in the society. In a bid to elaborate more on the law of contract the essay will not only look at contracts covered under common law but also contracts governed by the Uniform Commercial Code and the doctrines of promissory estoppels. The warranties of merchantability shall also be discussed and lastly the essay will come to a conclusion with case example of Drennan vs. Star Paving Company that relates to reliance, for a more understanding of the topic.

Contract law

Robert and Jody (2003, 98-140) are quoted in their studies as having defined contract as "an agreement between two or more parties with an intention to create legal relations or legally binding obligations." David (2002, 12-34) criticized this definition because it excluded domestic agreements, special contracts and promises. David (2002) continued to say that there are several types of contract but nevertheless contracts can be basically classified as under; valid contracts, voidable contracts and lastly void contracts. It is however important to note that this classification are dependent upon the presence, incomplete state as well as absence of what are known as the essential elements of a valid contract and which are as follows: offer, acceptance, genuine consent, contractual capacity, consideration, Intention to create legal relations and lastly legal object. These essential elements that have been mentioned below are the deciding factors of the legality of a contract and what the impact of contract law can have on individuals and organizations in the society.

Offer demotes the initial stage of a contract and for an offer in a contract to be complete it must fulfill the following conditions; offer must be made expressly or by implications, it must be made in rem or personam, must be communicated, must presume to result in legal consequences if accepted, the terms of the offer must be certain as well as capable of acceptance and most importantly if there are any conditions to the offer these too must be communicated.

Joseph (1999, 234-345) wrote that for acceptance to be complete in a contract it must also be expressed or implied, communicated, made in personam and made in a manner indicated in the offer and also within the period of time indicated in the offer or within a reasonable time. Acceptance must be made absolutely and without conditions, because conditions will amount to counter-offer which destroys the original offer. Moreover once the acceptance has been made it cannot be revoked without certain legal consequences.

Generally in law all persons are presumed to be able to contract and therefore capable of being held liable to such contacts however a certain category of persons due to the handicap of age, illness as well as state of mind are however an exception to the above rule but must nevertheless prove their particular disability to escape liability and these include; minors, lunatics and intoxicated persons. After the age of majority (amendment) act 18 years became the age everyone to be defined as an adult regardless of sex, creed and race, consequently contracts entered with minors are general considered void except contracts for necessities and for the benefit of the minor's welfare. In the case of lunatics, contracts entered with them during lucid intervals are valid and binding on the lunatic. However for the lunatic to escape liability he or she must prove that at the time of contract he was suffering from lunacy and that the other party was aware of it. For intoxicated persons, the law requires that they prove that at the time of contract he or she was so intoxicated that he could not understand the full implications of the transactions and that the intoxicant was administered without his knowledge and consent.

Referring to studies done by Antony (2004, 232-320) he defined consideration as the price paid by one party for the promise of the other. A contract is legally enforceable when each of the parties to it gives something and gets something. The something given or obtained is the price for the promise and is termed as consideration.

When looking at the intention to create legal relations, there are two basic presumptions that come up regarding agreements and these are: domestic agreements are presumed to be unenforceable in law not unless the parties indicate that their agreement is enforceable. For commercial agreements they are presumed to be enforceable in the American law not unless the parties to the agreement indicate that their agreement should be unenforceable in law.

The object of a contract must be legal otherwise the contract will be null and void in law. The objective of a contract maybe unlawful if it is contrary to positive law, to the rules of morality sanctioned by the United States of is they are contrary to the welfare of the U.S. By interfering with the administration of public policy. Illegal objectives of a contract can be enlisted to comprise of contracts in restraint of trade, contracts to commit crime, contracts tending to abuse the legal process, contracts interfering with the sanctity of marriage and contracts to break the laws of friendly nations or contracts of trade with enemy nations, among others.

The contract law in America requires that a party consent to enter into contract must be genuine i.e. both parties must be of the same mind on the same matter at the same time in the same way. However there are various factors that may operate to prevent this from being arrived at, they include mistake, duress, misrepresentation and undue influence.

If a party enters into a contract under a mistake of fact this renders the contract voidable at his option since mistake of fact is generally excusable, whereas if a party enters a contract under a mistake of law, the contract is held to be valid and binding on him or her as mistake of law is generally not excusable.

During the making of a contract several statements will be made by both parties to each other such that if they later turn out to be false they are known as misrepresentation. Misrepresentation can be either innocent misrepresentation or fraudulent misrepresentation. Innocent misrepresentation occurs when the statement is made believing that it is true or if it is made without reason to think that it is false. Fraudulent misrepresentation occurs when the statement is made willfully knowing that it is false or without reason to believe that it is true.

Duress and undue influence are recognized under common law and equity respectively however; undue influence is more present in contracts today. Duress occurs when a party's consent to enter into a contract is obtained either through threat of physical violence, threat of imprisonment or threat of criminal prosecution. Undue influence is said to occur in a contract when a party to the contract is in a superior/fiduciary position either due to age, knowledge or skill and uses such position causing the other party to enter into such contract which had the circumstance been different the inferior party would not or would have entered into such contract respectively. Undue influence is presumed in contracts involving the following relationships; doctor-patient, advocate-client or teacher-student.

Discharge of contracts

The following are the methods through which contracts may be discharged: performance, agreement, breach of contract, frustration or impossibility of performance, death or lapse of time. A contract being essentially an agreement for the performance of various obligations by both parties then it must come to an end once the parties have performed their particular duties under it, thus discharging it.

As a general rule the impossibility of performance or frustration does not discharge a contract except under certain exceptional circumstances that include statutory interference, accidental destruction of the subject-matter of the contract, personal incapacity, cessation of circumstances whose continuation formed the basis of the contract and fundamental change of circumstances.

Steven, (2006, 89-98) wrote that just as contract is brought into existence by the mutual agreement of the parties, then consequently it may be also be brought to end by mutual agreement of the parties thereby discharging the contract. However there are occasions where both parties may not have fully performed their obligations under the contract in which case a bilateral discharge is necessary and involves agreement whereby each party agrees to release the other party. Consequently if one party to the contract has performed his obligations under the contract and other has yet to then in such a case a unilateral discharge is necessary and since there is no release by the non-performing party then such a discharge to be effective it must be under seal.

Upon the breach of contract by one party then the innocent party is entitled to the following remedies in law: treat the contract as being in existence and sue for damages for breach of warranty or treat the contract as discharged and sue for damages for breach of conditions.

Remedies for breach of contract

Upon the breach of contract by a party to the contract the innocent party is entitled to the following remedies in law; action for damages, action for specific performance, action for injunction, rescission and "quantum meruit"

In action for damages, the innocent may bring an action to court seeking damages for the breach of contract i.e. unspecified amount of money. Important to note is that this remedy is a common law remedy where a party is compensated in monetary terms.

In action for specific performance, the innocent may also bring an action for specific performance, which is a remedy in the nature of a court instructing the other party to specifically perform his or her part of the contract, this is an equitable remedy. Antony (2004, 232-320) noted in his studies that it is also a discretionary remedy that may not be granted in contracts involving minors, contracts to lend or to be lent, contract whose performance the court cannot supervise and where damages would be an adequate remedy. But this remedy is usual granted in contracts for the sale of land, contracts for the sale of rare items and contracts for the subscription of shares.

In action for injunction, this is a remedy in the nature of an order of court instructing the other party not to perform or continues to perform an act that is resulting in injury to other party, it is also an equitable remedy and injunctions may be of two forms, either permanent injunction or temporary injunction.

Doctrine of promissory estoppels

This is a doctrine in the law of contracts in which a promise that is non-contractual and lacks consideration is rendered as enforceable in the court of law to avoid injustice. The doctrine of promissory estoppels is applied when an injustice can be corrected by enforcing a promise that was otherwise unenforceable in the court of law because of lacking consideration. An example of such a case where this doctrine applies is where another party had relied on a promise which if deemed to be non-binding it will would be unfair to such a party.

Robert and Jody (2003, 98-140) in their studies enlisted some elements of the doctrine of promissory estoppels and they include; an implied or express promise, actual detrimental reliance by the promise, a detrimental reliance by the promise foreseeable to a reasonable person in the position of one making the promise and in the performance of a specific function an injustice can be avoided by enforcing such a promise.

Express warranty

An express warranty is created when a seller affirms a fact or a promise to the buyer pertaining to the goods they are transacting in, which can include the description of such goods, and as such this affirmation forms the basis of the sale bargain. This express warranty means that the goods shall conform to the promise or affirmation made earlier by the seller.

Charles, Nathan and Harry (2007, 989-1020) among other law practitioners, have noted that an express warranty can only be legally binding if the statement made is objective and specific. For example if a seller makes a statement that "this vehicle goes for forty miles per gallon" then such a statement is express warranty as it is specific and objective, but if the seller states that "this cargoes excellent mileage" then this is does not create an express warranty. On the other hand a sample or a model of product that determines if the buyer will purchase such a product and forms the basis of sale bargain creates an express warranty that the aforementioned product will conform to the sample or model of the product earlier shown. The court of law allows a buyer to return a product once purchased for a full return if it proves contrary to the express warranty earlier made.

Implied warranty of merchantability

Joseph (1999, 234-239) argued that in a sale transaction between consumer and merchant there is always an existence of implied warranty of merchantability, in that the consumer expects that goods bought will be fit for its' ordinary use. For example when buying a car from a dealer there is an implied warranty of merchantability warranting that the car will perform its' basic functions. However this promise does not cover every other thing that could go wrong after the car has been bought since things like breakdown do not prove that the seller breached the warranty of merchantability.

A breach of the implied warranty only arises when the consumer can prove that the aforesaid defect existed at the time of sale and a defect that occurs after the sale may have existed at the time of sale or not, and hence the liability of the merchant is only judged case by case.

Modification of implied warranties

The law governing the warranty of merchantability prohibits merchants who offer buyers a written warranty from modifying or disclaiming such implied warranties. This is translated to mean that however narrow or broad a written warranty is, the buyer will always receive basic compensation of the implied warranty of merchantability.

It is however important to note that there is one modification that is permissible on implied warranties. In the case of a merchant who offers a limited written warranty, he or she is allowed by the law to include a provision on the warranty that restricts the time frame of the implied warranty to the duration he has stated on the warranty. An example of this is when a merchant offers a one year limited warranty this means that he or she has limited the implied warranty to a one year period. However in the case of a full written warranty a merchant cannot limit the time frame of the implied warranty.

In scenarios where the seller is not the manufacture of the product being sold and doesn't warrant the product in writing he or she can disclaim the implied warranty, because the responsibility of the implied warranty lies on the manufacturer not seller. In such scenarios it is good business ethic to give buyers written warranties from the manufacture of the products.

Case example

Drennan vs. Star Paving Company

In this case Star paving who is a subcontractor submitted a bid for a public school construction project to Drennan a general contractor. Drennan on reliance to the bid made by Star Paving of seven thousand one hundred dollars prepared his final bid and was awarded the contract. A day after the bid had already been awarded, Star Paving informed Drennan that it had underestimated the project cost and declined to begin the construction work if the price hadn't being raised to no less than fifteen thousand dollars. Drennan hired another subcontractor to do the work for a fee of eleven thousand dollars, after which he sued Star Paving for the difference between eleven thousand dollars and seven thousand one hundred dollars which was three thousand nine hundred dollars. At the trial, the court entered judgment for Drennan, citing that Star Paving had made an offer of which Drennan had relied upon that offer when listing Star Paving as the subcontractor.

The two main issues that arise in this case are: can reasonable, justifiable and foreseeable reliance render an offer binding and what is the test for applying promissory estoppels?

The ruling of this case asserted that an offer that the promissory should reasonably expect to induce action or forbearance of a definite and substantial character by the promisee, and which does induce such action or forbearance, is binding if injustice can be avoided only by enforcing the promise. And also in order for the doctrine of promissory estoppels to apply there must be: a clear and definite offer; a reasonable expectation that the offer will induce reliance in the other party; actual and reasonable reliance by the offeree; and a detriment which only can be avoided by enforcement of the offer. Consequently the sub-contract bid from Star Paving constituted a promise to perform under conditions both implied and express, in accordance to the circumstances. The court ruling asserted that merely acting in justifiable reliance on a unilateral offer is sufficient to make that offer irrevocable for a reasonable duration to complete the contract.

Work cited

Antony Speaight, (2004) Architects Legal Handbook; the law for architects, Blackwell, pp 232- 320,

Charles L, K., Nathan, M, C, and Harry G, P., (2007) Problems in contract law: Cases and materials, Aspen Publishers, pp 989-1020.

David S, C., (2002), Introduction to the law of the United States, 12-34

Joseph, R., (1999). The Authority of Law, Essays on Law and Morality. Oxford University Press pp 234-345.

Robert E, S., and Jody, S, K., (2003), Contract law and theory, Lexis Nexis Publishers, pp, 78- 234.

Steven L, Emanuel, (2006), Contract, The Emanuel law outline series, ASPEN publishers, 76 Ninth Avenue New York, pp 89-98.

The constitution of the United States of America: Contract Law