Without contracts, the world would be a barren battleground of broken promises, reneging businesses, and untrusting individuals. There would be no peaceful way of holding anyone to a commitment, and the comprehensive inter-personal and national dependence our planet has developed would never come to fruition. The legal contract fixes this to some extent, allowing for individuals, firms, and countries to hold others to a promise with the power of the law to back them up should the other party break their word.
A binding contract can be defined as a legally enforceable agreement between two or more parties to perform a specific action (or inaction) that creates, defines, and governs the rights and obligations of the parties. Making one such contract can be a relatively simple process, but it always necessitates the unequivocal fulfilment of five requirements.
The first requirement is that the contract must have an offer and acceptance. To begin with, the offering party must give a clear and precise indication to the other party of what terms they are prepared to contract on. In the case of a unilateral contract (where one party promises something in return for an action that may or not be committed by any party who views the offer, also called invitation to treat), this could be an advertisement in the news or an email campaign, and for the more commonly occurring bilateral contract (where both the offering and accepting parties make commitments to one another), this tends to be a verbal agreement or a written letter.
The proposed terms are ones by which the offering party is willing and able to be legally bound. Should the offeree party agree to them they thereby accept the offer and in doing so complete the first condition of forming a contract.
The second requirement is there must be a desire of both parties to create legal relations. In business agreements, by default it is assumed that a contract is legally binding unless explicitly stated by the parties. On the other hand, for more informal situations it is the opposite; a contract is not assumed to be binding unless the spirit of the agreement was that it had legal ramifications, or it is clearly stated that it does have some.
This stipulation is often the most overlooked, as a contract may appear to be exactly the same with or without it. Having said that, the intent to create legal relations is necessary for the formation of a legal contract. Failing to fulfil this requirement leaves you with a contract and no legal obligation of either party to live up to their commitment, which makes it, in other words, an empty promise. A real-life example of this would be Tottenham Hotspur’s Harry Kane and his ‘gentlemen’s agreement’ with Daniel Levy (the owner of that football club) to allow Kane to leave on a transfer in the summer of 2021. Kane’s legal team attempted to enforce it when Levy denied him the opportunity, but as there was no intent from either party to create legal relations on that specific deal point at the time, it was to no avail, and Kane remained at Spurs.
Consideration is the third necessary element of a contract. At its simplest, it is what each party gets in return for fulfilling their contractual obligations. One example might be one party offering money to another in exchange for the offeree party not filing a lawsuit against them; this is often called a settlement. In this case, the offering party’s consideration is the money, and the offeree’s consideration is dropping the suit. Should one party’s consideration be something that they are already legally obligated to do, such as not drinking alcohol when they are a minor, then consideration is regarded as inadequate and the contract is null and void with no legal standing, even if the party does not drink and satisfies their side of the agreement.
In some US courts, consideration that is by nature nominal or is to all intents and purposes zero may also be seen as inadequate – this is the case when monetary consideration is put at something like $1. Another case where consideration can be voided and with it the contract too is again in the US, where if consideration is monetary and paid over a time frame of greater than one year it must be written. Oral agreements are just not accepted in this scenario.
The penultimate component of a contract is capacity. This means that the party has the right to enter into a legally binding contract should they be both competent and have the power to decide to agree to the contract. In many jurisdictions, contracts can be voided if one party was a minor at the time of agreement, as they are not considered mature enough. A party may also be viewed as incompetent should they be mentally incapacitated, either through disability or the influence of alcohol. A lack of a right to make a decision can occur when an employee of a firm acts ultra vires (beyond their power), where they agree for their company to enter a contract even when they do not have the power to do so, which once again nullifies the agreement.
Last but certainly not least, is that the parties must agree to the contract of their own free will. They must not be coerced by the other party to sign the agreement, and must not be under duress or undue influence when doing so. Failure to comply with this requirement almost always results in a voiding of the contract.
To surmise, to form a legally binding contract, the incontrovertible existence of 1) offer and acceptance, 2) desire of both parties to create legal relations, 3) consideration, 4) capacity, and 5) agreement to the contract of their own free will must be shown.
But there are still some cases in which a contract needs to be dissolved, either amicably or through force, and either with or without a remedy for the aggrieved party.
The first and most simple manner in which a contract ends is through expiration. This is either when a fixed expiry date is reached or if there is a right to termination within the contract itself.
The common law method of termination is the second way to dissolve a contract; it differs from expiration as the boundaries of that right to termination is set out by the parties themselves in the contract before signing. There are two types of breaches that fall under termination: breaches and anticipatory breaches. They are largely the same, with the only salient difference being that the former occurs when the obligations of the contract are ongoing and the latter occurs before such time. The three types of breach are 1) repudiation, 2) defective performance, and 3) disablement. Repudiation is simply the uncompromising refusal to fulfil a contractual promise, defective performance is when there is a noticeable disparity between the performance promised and the performance delivered, and disablement is when the perpetrating party incapacitates oneself and are rendered unable to deliver on their contractual obligations. The resolution to termination is either a voiding of the initial contract or the injured party bringing the case to court seeking a monetary remedy for damages incurred.
Vitiation is the third method of dissolution. It occurs when the basis on which the agreement is reached is flawed either through misrepresentation or mistakes. Misrepresentation takes place when one party makes a false claim which persuades the other party to enter into the contract. This can be either fraudulent, where the false claim is made despite knowledge of its falsity, or negligent, where the claim is made when there were no reasonable grounds to believe its truthfulness, or innocent, where the asserting party believed its truth entirely.
The three remedies available to the party subjected to misrepresentation are rescission, indemnification, or the awarding of damages. The first is where courts attempt to return both parties to the position they would have been in had the contract never been formed. The second involves the injuring party paying for all expenses incurred by the other party’s compliance with the now dissolved contract. The third is similar to indemnification, but the actual monetary value of the payment is more variable and up to the discretion of the courts who act in accordance with the merits of the case.
Mistakes are often confused with innocent misrepresentation. The reality is that they are quite similar: innocent misrepresentation (a false statement of facts) is always a mistake, but a mistake is not always innocent misrepresentation. A mistake can simply be an error in stating the law, or a typo, or a misordering of statements, or a missing document, and so on. Mistakes can also be common to both parties, whereas all forms of misrepresentation are unilateral.
The four types of mistakes are 1) common mistakes, 2) unilateral mistakes, 3) mutual mistakes, and 4) quality mistakes. A common mistake and unilateral mistake is both parties or one party respectively making the same error in relation to a foundational fact. Mutual mistakes are a fundamental lack of understanding between both parties. Quality mistakes result in the voiding of a contract only very rarely, where the quality of what is being contracted is erroneously interpreted by one or both parties, making the promise without the quality “essentially different” to what it was believed to be.
If any form of the above mistakes is proven, the contract is voided and the legal standing of both parties is ab initio (from the beginning).
The last means of disestablishing a contract is by means of frustration. This happens when unforeseen events, often colloquially referred to as ‘acts of god’ make the performance promised by the contract impossible, essentially different, or illegal. Frustration does not occur should there be a force majeure clause in the contract that is enacted before the frustrating event, or if one of the parties causes the frustrating event.
One thing that often comes about as a result of dissolution is one or both parties seeking remedies. There has already been the mention of these, but they have been because of caveats that belong to specific forms of types of dissolution.
In general, the claimant, or the injured party, must show the courts that 1) there has been tangible loss caused by a breach or something similar, 2) it is specified in the law that for that type of loss there is an entitlement to compensation, and 3) the loss is not too remote a fault of the offending party.
If proven, it can result in three outcomes: monetary damages, specific performance, or an injunction. Monetary damages is relatively self-explanatory, and just financial payment to the injured party from the offending party which can be either designed to return the injured party to the position they had been prior to the breach or to remedy any losses or potential losses of revenue incurred by agreeing to the contract or a combination of the two. Specific performance is where the courts decide that damages are insufficient and compel the breaching party to satisfy the terms of the contract. This is only possible if the claimant has done no wrongdoing in the matter and if it is “just and equitable” to oblige specific performance. The final outcome, an injunction, can either be interlocutory (regulation of the parties until the outcome of the hearing) or permanent, and either prohibitory or mandatory (ordering the party in breach to reverse the effects of the breach).
As is clearly visible, contracts are a complex and often convoluted area of the law. Its formation requires the satisfaction of several elements, the manners of its potential dissolution are multitudinous, and the remedies available to injured parties are vast but subject to a rigorous process of inspection in a court. But for the foreseeable future, contracts, with all the benefits and all the baggage, will remain an essential part of everything from the formal business deals we do to the casual handshake promises we make.
Bibliography
https://www.aristocracy.london/the-8-1-rules-of-handshake-etiquette/
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