Law of Contract Essay

This foundational course examines the basic doctrines and issues of contract law, including the creation of rights and obligations from voluntary undertakings, the doctrines which circumscribe the circumstances under which the law permits a dissolution of the contract, and the remedies that the law provides for the breach of contractual obligations. In exploring the constituent components of contracts – formation, privity, frustration, breach, remedies, terms and vitiating factors – the course also examines challenges to the traditional model of contract law, tensions arising from the pulls of certainty and fairness, and other broader issues.Introduction(i) Why do we need contract law?* Promises should be binding* We live in a market capitalist society where people buy and sell freely; for a free market economy to work efficiently its members must be able to plan their business activities, and they can only do this if they know that they can rely on promises made to them* In reality it is often difficult to choose business partners who we know would be unlikely to dishonour agreements, thus contract law is needed to render certain promises and agreements legally binding* Law of contract also prescribes the steps that can be taken by the other party in the event that such promises or agreements are not in fact performed(ii) Scope and basis of Law of contract* Contract Law is premised on two very important principles: the sanctity of contract (when parties enter into a contract, they are held sacred by the law) and the freedom of contract (freedom of all parties to agree upon any contractual terms they please)* The law provides a framework allowing parties to know what they had to do to make their agreements binding, and was intended to treat everyone equally, since to make different rules for one party than for another would be to intervene in the fairness of the bargain [procedural fairness]* The problem is that if people are unequal to begin with, equal treatment simply maintains the inequality, and this has serious repercussions in contract law (e.g. employer / employee)* Over the last century, substantive fairness (distributive justice) has developed, which aims to redress the balance of power between unequal parties, giving protection to the weaker one, like employees (cannot be dismissed without reasonable grounds), tenants, consumers, persons who are not of full age or understanding* Also, law of contract exists to protect public interest, for example where public policy requires that contracts entered into for illegal purposes should not be enforceable(iii) The objective approach* Problems may arise as to what the parties agreed to in a contract, for e.g. clean your car = cleaning the outside only (my terms) but vacuuming the inside as well (your terms)* Contract law’s approach is to look for the appearance of consent, such that if my words or actions would suggest to a reasonable person that I was agreeing to (clean the inside as well) then that is what I have to do before I am paid* Quote Blackburn J: “If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.”* A potentially harsh result may arise in the situation where a person who sings a contractual document is bound by it, even though they may not have understood or even read itSummary flowchart of the Life of a contractLegal issues which may arise in the formation and performance stages of a contractStagesLegal IssuesElements to be considered in deciding issueFormationHas an agreement been reached?* Offer* AcceptanceIs the agreement legally binding?* Intention to create legal relations* Consideration* FormalitiesAre there factors present which could invalidate the contract?* Misrepresentation* Mistake* Duress* Undue influence* Unconscionable bargains* Illegality* IncapacityPerformanceIs there full performance?* Terms of contract* Performance / BreachIs the non-performance excused?* Effect of exemption clauses* Variation or termination by agreement* Termination by frustrationIs there a breach?* Terms of contract* Performance / Breach* Dispute resolution* Remedies of innocent partyMaking a contractThere are four basic elements in the formation of a contract:* An agreement between the parties (which is usually shown by the fact that one has made an offer and the other has accepted it);* An intention to be legally bound by that agreement (often called intent to create legal relations);* Consideration provided by each of the parties – put simply, this means that there must be some kind of exchange between the parties.

If I say I will give you my car, and you simply agree to have it, I have voluntarily made you a promise (often called a gratuitous promise), which you cannot enforce in law if I change my mind. If, however, I promise to hand over my car and you promise to pay me a sum of money in return, we have each provided considerationIn addition, the parties must have the legal capacity to contract, and comply with certain formalities in certain cases. Also, other than a few exceptions, it is not necessary for a contract to be in writing – a contract is an agreement, not a piece of paper.Unilateral and bilateral contracts* Bilateral contract: Each party takes on an obligation, usually by promising the other something – for example, X promises to sell something and Y to buy it (although called bilateral, there may be more parties involved)* Unilateral contract: One party promises to do something (usually to pay money) if someone else does a certain thing (or in certain cases, does not do a certain thing). For example, you promise to pay a $100 reward to anyone who finds your lost purse. Only one party has assumed an obligation (you are obliged to pay a reward but nobody need actually have undertaken to do so)* Common example of unilateral contract is that between estate agents and people trying to sell their homes – the seller promises to pay a specified percentage of the house price to the agent if the home is sold, but the agent is not required to promise in return to sell the house or even to try to do soPart One: AgreementFor a contract to exist, usually one party must have made an offer, and the other must have accepted it (an agreement is reached). Once acceptance takes effect, a contract will usually be binding on both parties, and the rules of offer and acceptance are typically used to pinpoint when a series of negotiations has passed that point, in order to decide whether the parties are obliged to fulfil their promises. There is generally no halfway house – negotiations have either crystallised into a binding contract, or are not binding at all.

(i) Offers vs. Invitations to treat* Offer: A statement by one party to a contract that he or she proposes to give or do or pay for something* Person making offer is the offeror; person to whom offer is made is the offeree* An offer may be express (telling) or implied by conduct (bringing goods to a cashier in the store)* Offers can also be addressed to a group of people, or even the general public, and is usually a unilateral contract* Examples include paying a sum for lost and found items, claims in advertisements (e.g. company pays you $100 if you use product and still fall ill)* Some kinds of transaction involve a preliminary stage in which one party invites the other to make an offer, called an invitation to treat* The difference between an offer and an invitation to treat is that the former is capable of being turned into an agreement by acceptance of the offer, but the latter cannot be accepted* Confusion can sometimes arise when what would appear to be an offer is held by the law to be only an invitation to treat, especially in the following areas:Specific SituationsOffer or Invitation to TreatAdvertisements for the sale of goodsInvitation to treat unless words and nature of advertisement indicate otherwise (esp. phrases like “while stocks last” or “limited to first 20 callers”Display of goods for saleInvitation to treat unless circumstances indicate otherwiseReply to request for informationProbably invitation to treat but much depends on actual replyCall for tenderInvitation to treat unless call for tender specifies otherwise (to lowest tender)Call for bid at auctionInvitation to treat unless call for bids specifies otherwise (to highest bidder)a) Advertisements* Advertisements which advertise specified goods at a certain price are usually considered invitations to treat* Case 1: If ABC company has 50 units of a sofa to sell, and puts up an advertisement: “Offer! Offer! Sofas for sale! Only $500 each. Call ABC Pte Ltd at 6665 1700.”* Since the demand could exceed the 50 units it has and they would then be unable to fulfil their obligations, it would be logical to infer that ABC merely had the intention to negotiate with the persons who called, thus, this is considered an invitation to treat* Advertisements that are made on the basis that the contract can normally be accepted without any need for further negotiations between the parties, and the person making the advertisement intends to be bound by it, are treated as offers for unilateral contracts* Case 2: If an advertisement entails that the offer was valid while stocks last or that it was restricted to, say, the first 20 callers, then it would not be unreasonable for the advertiser to intend to be bound by the callers who fulfilled the conditions stated in the advertisement, since they would be limited to a contemplated numberb) Goods displayed in shops* Price-marked goods on display on the shelves/windows are generally regarded as invitations to treat, rather than offers to sell at that price* Where goods are sold on a self-service basis, the customer makes an offer when presenting the goods at a cash desk, where the shopkeeper may accept or reject that offer (and normally the shopkeeper accepts the offer when he accepts the money handed over to the cashier)* This position accords with common sense for two reasons: First, to hold that a display of goods is an offer by the shop which is accepted by the customer selecting the goods would mean that the customer can insist on buying any of the goods on displayed and the shopkeeper has no say in who he wants to sell it to, and secondly, it would also mean that the contract of sale is entered into upon the customer selecting the goods and the customer would not be able to change his mind even though he has not paid for the goods or approached the payment counterc) Reply to request for information* For example ABC’s manager sees an advertisement in the papers stating that XYZ company has 5 used tables for sale, and calls XYZ’s manager to ask for the lowest price which they are willing to sell the 5 tables* If XYZ’s reply is “$80 a table”, the issue is whether this reply amounts to an offer to sell the tables at $80 each or whether it was merely an answer to ABC’s question about the minimum price at which XYZ is willing to sell its table* If it is the latter, then the legal position is that an answer to a request for information is not an offer, and it would follow that ABC’s purported acceptance of the tables at the price of $80 each would not be effective* It is difficult to draw guidelines to differentiate the two cases and it would be prudent for a seller, who is merely giving a reply to a question and not intending to bind himself to sell, to make it very clear in his reply(ii) Termination of offer* An offer stands until it is terminated, at which point it ceases to exist and can no longer be acceptedMethod of terminationCommentsRevocation by offerorMust be:* Done before acceptance; and* Communicated to offeree* Not bound to separate contract keeping offer openRejection by offereeCan be:* Express (telling); or* Implied (e.g.

counter-offer / other actions)Note: offer would cease to exist once rejectedLapse of timeCan be as a result of:* Expiration of stated period; or* Lapse of reasonable period of timeDeath of offerorOnly where:* Offeree knows of death; or* Contract has personal element (e.g. involves the offeror to perform a service)Death of OffereeDepends on words and nature of offer (on whether offer was intended to be capable of being accepted by the offeree or his estate / executors or not)a) Revocation of offer* Revocation can be done by either the offeror or a third party (to be safe, usually an authorised agent) communicating the revocation directly to the offeree* Revocation is not possible if the offeror has bound himself to keep the offer open, which can be done when both the offeror and the offeree enter into a separate contract whereby the offeror promises to keep the offer open in return for which the offeree will normally promise to pay to the offeror a certain sum of money (this is the consideration given by the offeree for the promise)* E.g. Property situations: A landowner offers to sell his property to a prospective buyer for a certain price, and in order to give the buyer time to decide and make any necessary arrangements (e.

g. paperwork), the landowner enters into a contract with the buyer under which the landowner promises to keep his offer open for, say two weeks, and in return the buyer pays the landowner a sum of money, say 1% of the purchase price* At this point, the buyer can choose not to accept the offer for the sale of the property if he so chooses, however the buyer may not revoke his offer* Another special situation is in that of unilateral contracts (e.g. offering a reward for the return of a lost item)* It has been suggested that offers of unilateral contracts should be regarded as irrevocable once performance has started, but it is too sweeping a statement and at the end of the day, the view taken will probably depend very much on the nature of the offer itself and what was contemplated by the parties involved(iii) Acceptance* Acceptance: Final and unqualified assent by the offeree to the terms of the offer* Like an offer, an acceptance can be express or implied (e.g. started to use a product mailed to him)* The following scenarios are not considered acceptance:> A counter-offer is tantamount to a rejection of the original offer> A conditional acceptance is not a ‘final and unqualified assent’ and is thus not regarded as a valid acceptance, with no legally binding contract formed* Many commercial organisations enter into contracts on their own standard terms (by means of getting anyone who contracts with them to sign a standard printed form)* Difficulties arise when different parties have their own standard form contract they want to use, because both parties may purport to contract their own standard set of terms even though these terms may not be identical or may even conflict* The law takes the following approach: The parties have come to an agreement if they subsequently proceed on the basis that they have entered into a contract; and the terms of this contract would then be the terms which were last referred to or last acknowledged by the other party(iv) Requirement of knowledge of offer:* A party who does not know of an offer but perform acts that fulfil the terms of the offer, and who later finds out about the offer, cannot be said to have accepted the offer since there cannot be consent or assent to something the party has never heard of (e.g. buys 10 units of a good without knowing of a ‘Buy 10 get 1 free’ promotion and not receiving 1 unit free)* This may not be as unfair as it appears since the offeree was originally perfectly willing to perform the act without any reward, and the offeror can thus be said to have benefitted not at the expense of the offeree’s expectations* The same can be said for complementary cross-offers made to each other simultaneously without knowing of the other’s offer (A offers to buy at a price while B offers to sell at same price simultaneously)* One offer cannot be said to be the acceptance of the other offer since the two offers were made without knowledge of the other(v) Communication of acceptance* Acceptance is not effective until it is actually communicated to the offeror by the offeree or his authorised agent* The ‘postal rule’ is an exception which states that an acceptance by post takes effect when the acceptance is posted and not when it is received, and is valid even if the letter never reaches its destination* Rule only applies where it is specified that acceptance may be done by post or where it is reasonable to do so* Does not apply in the follow situations: (i) Terms of contract state acceptance is valid only upon receipt; (ii) Acceptance is made by way of instantaneous communication* Postal rule only applies to communication of acceptance and not to communication of: (i) an offer; (ii) revocation of an offer; (iii) revocation of an acceptance(vi) Effect of Inaction* Inaction would not normally amount to a binding acceptance of an offer* However, if the offeror has expressly or impliedly (e.

g. offers for unilateral contracts) waived the need for communication, he would be bound by an acceptance even though it was never communicated to him* Whilst the offeror can waive the requirement for communication of acceptance, he cannot do so to the detriment of the offeree by deeming that inaction on the part of the offeree would amount to an acceptance* The law also does not allow the offeror to impose on the offeree the burden of rejecting its offer(vii) Revocation of acceptance* The general rule is that an acceptance can be revoked as long as the revocation of acceptance is communicated to the offeror before the acceptance itself has been communicated to him* If the postal rule applies however, it seems that no revocation is allowed since the contract would have come into being the moment the letter of acceptance is posted* This can be argued to be a fair position since, if the offeree were allowed to revoke his acceptance before the letter of acceptance actually reached the offeror, he would be getting the best of both worlds since the offeror would be bound upon posting of the letter, yet at the same time the offeree can still withdraw his acceptance before it reaches the offeror* There have also been arguments to allow the revocation of posted acceptances since the offeror would not be aware of the acceptance prior to its revocation and would thus not be at a prejudice(viii) Time of agreement* While it may be obvious to all parties that an agreement had been reached at some point of time, it can be difficult to pinpoint when the offer was actually made and accepted* This can be crucial in cases where a party wants to allege that a particular clause is a term of the contract, and it would have to show that the clause was introduced before the contract was complete (i.e.

offer accepted)* Some models to show offer and acceptance:X proffers (offer) document:1st to sign: Offer Offer2nd to sign: Acceptance Y signs: Acceptance1st to deliver: Offer2nd to deliver: AcceptanceConclusionMany legal problems can arise during the various stages of making a contract, even the initial stages. Caution should be exercised not only when the contract is actually entered into but from the time of starting negotiations.The person beginning the negotiations must:* be clear as to whether the terms he first suggests is an offer or merely an invitation to treat* endeavour to inform the offeree of any change after making an offer, as soon as possibleThe offeree must:* be clear about whether a reply is an inquiry or a counter-offer (latter being a rejection of the original offer)* communicate acceptance properly to the offerorPart Two: Making an agreement bindingIn order to make an agreement legally binding, two additional elements are required on top of an agreement. They are an intention to create legal relations and also consideration, which can be seen as the price required to be paid by the party taking the benefit of promises contained in the agreement. Without consideration to support these promises, they will not be enforceable in a court of law.(i) Intention to create legal relations* For an agreement to be legally binding, it must be shown that the parties intended to create a legal relationship between them* However, if at the time of entering into an agreement, the parties intended that neither should be able to bring an action unto a court of law for the non-performance of the other, then the law will not allow this intention to be subverted (undermined) later on* The court determines the intention of parties by looking at the external manifestations of the parties’ intentions (what they said or did and the circumstances in which they said or did those things)* There are two different types of situations in which an agreement can arise, as discussed belowDomestic and social agreementsCommercial agreementsPresumption that the parties do not intend to create legal relationsPresumption that the parties do intend to create legal relationsPosition is rebuttable if sufficient evidence is provided to show an intention to create legal relations (e.

g. agreement made in writing)Position is rebuttable if sufficient evidence is provided to show no intention to create legal relations, especially in situations below:Express provision (of which clauses must be sufficiently clear)Example is a clause which states that the agreement is made ‘subject to contract’, which effectively postpones the time when the agreement becomes a binding contract (until a formal contract is drawn)Or clause which is described as an ‘Honourable Pledge Clause’Letter of comfort, which is usually given by one party in relation to the creditworthiness of another party. “It is the policy of the issuer of this letter of comfort that the borrower is at all times in a position to meet its liabilities in respect of the loan.” (Debatable since hard selling could be involved)Letters of intent and memoranda of understanding which merely records the intention of the parties* It bodes well to note that it is not the label of title of the document but the substance of the document which decides the binding nature of the document(ii)Consideration* Consideration can be defined as the price for which a promise is bought* Normally either a benefit which the promisee confers on the promisor or a detriment suffered by the promisee in return for receiving the promise* For a bilateral contract, both parties undertake obligations under the contract for which the other must provide consideration (promises and considerations are made by both parties)* For a unilateral contract, only one party gives a promise for which consideration must be provided* Consideration can take the form of an act performed by one party in return for a promise by the other (executed consideration);* Or it can take the form of a mutual exchange of promises (executory consideration), and the consideration from the promisee is not yet fully performed and he still needs to actually carry out his promise* Under English and Singapore law, obligations and promises contained in an agreement must be supported by consideration if they are to be enforceable in a court of law* The reason is that both parties to a contract are supposed to have made a bargain, hence there is a need to show that each party receives something in return for what he has given, and conversely, pays a price for what he has received* The exception to this is where the agreement or promise is by way of deed (a written contract which is signed, sealed and delivered)* For an individual, a contract under seal would normally mean that the signature portion of the contract would have the words ‘Signed, sealed and delivered’ (or similar words to that effect) and a little red sticker symbolising red wax stuck next to the signature* For a company, the signature portion would normally have the words ‘The common seal of (Name of Company) was affixed hereunto’ (or similar words to that effect), with a red sticker stuck there and the common seal of the company imprinted onto the red sticker(iii) Flow of consideration* In order to render a promise enforceable at law, consideration for the promise must have been provided by the promisee himself and not somebody else, but the benefit of the consideration need not be given to the promisor directly (promisee can confer a benefit to a third party, or suffer some detriment at promisor’s request)* For example, in a guarantee situation where the guarantor (promisor) gives a guarantee (promise) to a lender (promisee) in order to secure a loan given to a borrower (third party), the consideration moving from the lender in return for the guarantor’s promise to pay, is the giving of the loan* However, the benefit does not move to the guarantor but to the borrower. Nonetheless, this consideration is able to support the guarantor’s promise of payment to the lender(iv) Past consideration* If what is alleged to constitute the consideration for a promise was in fact given before the promise itself was given, the consideration is regarded as past consideration* The general rule is that past consideration cannot support a promise* However, there is an exception to the general rule against past consideration, which applies if two requirements are satisfied: (i) the past consideration must have been given at the request of the promisor; and (ii) it must have been understood by the parties at the time the past consideration was given that the person giving the past consideration would be compensatedABC Company is renovating its premises and under the agreement with its contractor, the works are to be completed by 15 July.

The contractor finishes a week early. ABC is pleased and promises an extra $2000 in addition to the agreed fee.ABC approaches the contractor to ask him to complete the renovation works a week early (condition (i) is satisfied), but makes no express promise to give any extra money.

Nonetheless the contractor finished the work a week earlier, to the delight of ABC which then promises an extra $2000 in fees.Promise$2000 in extra fee from ABC to contractorConsiderationContractor finishing the work a week earlyCommentsConsideration cannot be said to be the price for which the promise of $2000 was bought since it was done before the promise was made (past consideration)Condition (ii) can be said to be satisfied as well since it is probable that both ABC and the contractor must have understood that the contractor would be compensated in some way for the time and money spent in trying for an earlier completionIt can also be said that the consideration given in this case is not past consideration since the subsequent promise was contemplated, although not specified, at the time the consideration was given(v) Adequacy of consideration* In contract law, the terms ‘adequate’ and ‘sufficient’ are not synonymous insofar as the topics of contract law and consideration are concerned* ‘Adequacy’ of a consideration is whether or not the consideration is quantitatively enough to compensate the promisor for his promise* The rule of law, however, is that the consideration received need not be such that a third party would find it commensurate with the promise given, on the premise that the law assumes that parties to a contract know what they want* It is thus sufficient to support a promise just by giving a nominal (small) consideration(vi) Sufficiency of consideration* The sufficiency of consideration deals with the nature of the consideration instead of the quantity of the consideration since certain things are considered to have no real value in the eyes of the lawNot sufficient Consideration for promiseSufficient consideration for promiseNo economic value ascribed to it (e.g. love and affection)Performance of existing public duty, which he already owes the public (police to reasonably protect, testify in court etc)Performance of duties over and above the existing public duty (e.g. police to provide stationary guard when mobile force is enough, is sufficient consideration for a promise to pay a certain amount of money)Not sufficient Consideration for promiseSufficient consideration for promisePerformance of existing contractual duty owed to promisor** (e.g.

providing 10 new chairs) is not sufficient consideration for any new promise (e.g. to pay extra $100)Performance of duties over and above the existing contractual duty (e.g. providing an extra 2 chairs)Performance of existing contractual duty owed to a third party (e.g. Prof X already owes a contractual duty to School Y for delivering a lecture to a Law class, Z.

The class Z, keen to gain an upper hand against the other classes, promises an extra $500 to Prof X to deliver the lecture. Prof X’s delivery of the lecture constitutes sufficient consideration for Z’s promise of $500 even though it is an existing contractual duty owed to School Y.)Partial performance of existing obligation owed to promisor (e.g. paying of a smaller sum of money to discharge the full debt) is not sufficient consideration for the promisor promising to accept a partial performance of the existing contractual duty owed to him in full satisfaction of this existing dutyIf, at the request of the promisor, something is done which is more or different from the existing obligation (e.

g. paying a smaller sum but at an earlier date or partial payment by a person other than the debtor himself), it would be deemed sufficient consideration since the promisor would now be getting the benefit of an act which he was not originally entitled to demand**Note that the general rule is subject to a possible exception laid down in the English case of Williams v Roffey Bros [1991] 1 QB 1. In that case, the court held that, in special circumstances, the performance by the promisee of an existing contractual duty owed to the promisor can constitute sufficient consideration for a promise by the promisor of additional remuneration. This would be when the promisor becomes aware of the possibility that the promisee would not be able to perform his existing contractual duty and the promisor then voluntarily promises additional payment in return for the promisee performing his existing duty. The court thought that, in such a case, the promisor would obtain the benefit or at least avoid the disbenefit of the promisee not performing his existing contractual duty.

Thus, the promisee’s performance of an existing contractual duty owed to the promisor in this specific situation would amount to sufficient consideration. This has been subject to much criticism and has not yet been applied in Singapore.

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