CONTRACT

ON

BUSINESS LAW

KRISHAN KAPOOR

Reg No: (S1AB2A71150A)

GREAT EASTERN MANAGEMENT SCHOOL

BANGALORE

2011

CERTIFICATE

This is to certify that the Project work of “BUSINESS LAW” submitted to the

College by the candidate Mr.KRISHAN KAPOOR, bearing Reg No.

(S1AB2A71150A)

Is the product of bonafide research carried out by the candidate under my

supervision in Business Law.

Bangalore

July 2011 (GUIDE)

Mr. Gurudatta

Lecturer , Business law

ACKNOWLEDGEMENT

The Project work was carried out under the remarkable guidance of

Mr.Gurudatta, Lecturer, Great Eastern Management School. I am grateful for her

guidance and valuable suggestions and for the constant encouragement and co-

operation.

I also express my sincere gratitude and thanks to all the teachers who helped me

to complete this project.

CONTENTS

1. INTRODUCTION2. Contract formation

3. Offer and acceptance4. Formation5. Invitation to treat6. Value of consideration7. Pre-existing legal duties8. Estoppel9. Intention to be legally bound10. Statute of frauds11. Uniform Commercial Code12. Contractual terms 13. Subject to contracts14. Misrepresentation15. Contract theory16. National contract law17. Agreement18. Breach of contract19. Australian contract law

Contract

INTRODUCTION

In law, a contract is an agreement between two or more parties which, if it contains the elements of a valid legal agreement, is enforceable by law or by binding arbitration. That is to say, a contract is an exchange of promises with specific legal remedies for breach. These can include Compensatory remedy, whereby the defaulting party is required to pay monies that would otherwise have been exchanged were the contract honoured, or an Equitable remedy such as Specific Performance, in which the person who entered into the contract is required to carry out the specific action they have reneged upon.

Agreement is said to be reached when an offer capable of immediate acceptance is met with a "mirror image" acceptance (i.e., an unqualified acceptance). The parties must have the necessary capacity to contract and the contract must not be either trifling, indeterminate, impossible, or illegal. Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda (usually translated "agreements are to be kept", but more literally "pacts must be kept").Breach of contract is recognized by the law and remedies can be provided.

As long as the good or service provided is legal, any oral agreement between two parties can constitute a binding legal contract. The practical limitation to this, however, is that generally only parties to a written agreement have material evidence (the written contract itself) to prove the actual terms uttered at the time the agreement was struck. In daily life, most contracts can be and are made orally, such as purchasing a book or a sandwich. Sometimes written contracts are required by either the parties, or by statutory law within various jurisdiction for certain types of agreement, for example when buying a house or land.

Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations (along with tort, unjust enrichment or restitution).

According to legal scholar Sir John William Salmond, a contract is "an agreement creating and defining the obligations between two or more parties".

As a means of economic ordering, contract relies on the notion of consensual exchange and has been extensively discussed in broader economic, sociological and anthropological terms (see "Contractual theory", below). In American English, the term extends beyond the legal meaning to encompass a broader category of agreements.

This article mainly concerns contract law in common law jurisdictions (approximately coincident with the English-speaking world and anywhere the British Empire once held sway). Common-law jurisdictions usually offer proceedings in the English language, which has become to an extent a lingua franca of international business. The common law retains a high degree of freedom of contract, with parties largely free to set their own terms, whereas civil-law systems typically apply certain over-arching principles to disputes arising out of contract (see, for example the French Civil Code). It is very common for businesses not located in common-law jurisdictions to opt in to the common law through a Choice of law clause.

However, contract is a form of economic ordering common throughout the world, and different rules apply in jurisdictions applying civil law (derived from Roman law principles), Islamic law, socialist legal systems, and customary or local law.

Contract formation

The eight key requirements for the creation of a contract are:

Agreement (Offer and Acceptance) Capacity to contract

Consideration

Legal purpose

Legality of form

Intention to create legal relations

Consent to contract

Vitiating factors: Mistates, undue influence, misrepresentation, duress

In civil-law systems, the concept of consideration is not central.

In most systems of law, parties have freedom to choose whether or not they wish to enter into a contract, absent superseding duties. In American law, one early case exemplifying this proposition is Hurley v. Eddingfield (1901), in which the Supreme Court of Indiana ruled in favor of a physician who voluntarily decided not to help a patient whom the physician had treated on past occasions, despite the lack of other available medical assistance and the patient's subsequent death.

In addition, for some contracts formalities must be complied with under legislation sometimes called a statute of frauds (especially transactions in real property or for relatively large cash amounts).

Offer and acceptance

The most important feature of a contract is that one party makes an offer for an arrangement that another accepts. This can be called a concurrence of wills or ad idem (meeting of the minds) of two or more parties. The concept is somewhat contested. The obvious objection is that a court cannot read minds and the existence or otherwise of agreement is judged objectively, with only limited room for questioning subjective intention: see Smith v. Hughes. Richard Austen-Baker has suggested that the perpetuation of the idea of 'meeting of minds' may come from a misunderstanding of the Latin term 'consensus ad idem', which actually

means 'agreement to the [same] thing'. There must be evidence that the parties had each from an objective perspective engaged in conduct manifesting their assent, and a contract will be formed when the parties have met such a requirement. An objective perspective means that it is only necessary that somebody gives the impression of offering or accepting contractual terms in the eyes of a reasonable person, not that they actually did want to form a contract.

The case of Carlill v Carbolic Smoke Ball Company is an example of a 'unilateral contract', obligations are only imposed upon one party upon acceptance by performance of a condition In the United States, the general rule is that in "case of doubt, an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses."

Offer and acceptance does not always need to be expressed orally or in writing. An implied contract is one in which some of the terms are not expressed in words. This can take two forms. A contract which is implied in fact is one in which the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, by going to a doctor for a checkup, a patient agrees that he will pay a fair price for the service. If one refuses to pay after being examined, the patient has breached a contract implied in fact. A contract which is implied in law is also called a quasi-contract, because it is not in fact a contract; rather, it is a means for the courts to remedy situations in which one party would be unjustly enriched were he or she not required to compensate the other. For example, a plumber accidentally installs a sprinkler system in the lawn of the wrong house. The owner of the house had learned the previous day that his neighbor was getting new sprinklers. That morning, he sees the plumber installing them in his lawn. Pleased at the mistake, he says nothing, and then refuses to pay when the plumber delivers the bill. Will the man be held liable for payment? Yes, if it could be proven that the man knew that the sprinklers were being installed mistakenly, the court would make him pay because of a quasi-contract. If that knowledge could not be proven, he would not be liable. Such a claim is also referred to as "quantum meruit".

Offer and acceptanceOffer and acceptance analysis is a traditional approach in contract law used to determine whether an agreement exists between two parties. As a contract is an agreement, an offer is an indication by one person (the "offeror") to another (the "offeree") of the offeror's willingness to enter into a contract on certain terms without further negotiations. A contract is said to come into existence when acceptance of an offer (agreement to the terms in it) has been communicated to the offeror by the offeree.

The offer and acceptance formula, developed in the 19th century, identifies a moment of formation when the parties are of one mind. This classical approach to contract formation has been weakened by developments in the law of estoppel, misleading conduct, misrepresentation and unjust enrichment.

Offer

Treitel defines an offer as "an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed", the "offeree". An offer is a statement of the terms on which the offeror is willing to be bound.

The "expression" referred to in the definition may take different forms, such as a letter, newspaper, fax, email and even conduct, as long as it communicates the basis on which the offeror is prepared to contract.

Whether two parties have an agreement or a valid offer is an issue which is determined by the court using the Objective test (Smith v. Hughes). Therefore the "intention" referred to in the definition is objectively judged by the courts. In the English case of Smith v. Hughes the court emphasised that the important thing is not a party's real intentions but how a reasonable person would view the situation. This is due mainly to common sense as each party would not wish to breach his side of the contract if it would make him or her culpable to damages, it would especially be contrary to the principle of certainty and clarity in commercial contract and the topic of mistake and how it affects the contract. As a minimum requirement the conditions for an offer should include at least the following 4 conditions: Delivery date, price, terms of payment that includes the date of payment and detail description of the item on offer including a fair description of the condition or type of service. Without one of the minimum requirements of condition an offer of sale is not seen as a legal offer but rather seen as an advertisement.

Unilateral contract

The contract in Carlill v Carbolic Smoke Ball Co was of a kind known as a unilateral contract, one in which the offeree accepts the offer by performing an act which indicates their agreement with the bargain. This can be something as simple as raising an eyebrow or wearing a certain color t-shirt. It can be contrasted with a bilateral contract, where there is an exchange of promises between two parties. In Australian Woollen Mills Pty Ltd v. The Commonwealth (1954), the High Court of Australia held that, for a unilateral contract to arise, the promise must be made "in return for" the doing of the act. The court distinguished between a unilateral contract and a conditional gift. The case is generally seen to demonstrate the connection between the requirements of offer and acceptance, consideration and intention to create legal relations.

Invitations to treat

An invitation to treat is not an offer, but an indication of a person's willingness to negotiate a contract. In Harvey v. Facey, an indication by the owner of property that he or she might be interested in selling at a certain price, for example, has been regarded as an invitation to treat. Similarly in Gibson v Manchester City Council[5] the words "may be prepared to sell" were held to be a notification of price and therefore not a distinct offer, though in another case

concerning the same change of policy (Manchester City Council underwent a change of political control and stopped the sale of council houses to their tenants) Storer v. Manchester City Council, the court held that an agreement was completed by the tenant's signing and returning the agreement to purchase, as the language of the agreement had been sufficiently explicit and the signature on behalf of the council a mere formality to be completed.

The courts have tended to take a consistent approach to the identification of invitations to treat, as compared with offer and acceptance, in common transactions. The display of goods for sale, whether in a shop window or on the shelves of a self-service store, is ordinarily treated as an invitation to treat and not an offer.

The holding of a public auction will also usually be regarded as an invitation to treat. Auctions are, however, a special case generally. The rule is that the bidder is making an offer to buy and the auctioneer accepts this in whatever manner is customary, usually the fall of the hammer. A bidder may withdraw his or her bid at any time before the fall of the hammer, but any bid in any event lapses as an offer on the making of a higher bid, so that if a higher bid is made, then withdrawn before the fall of the hammer, the auctioneer cannot then purport to accept the previous highest bid. If an auction is without reserve then whilst there is no contract of sale between the owner of the goods and the highest bidder (because the placing of goods in the auction is an invitation to treat) there is a collateral contract between the auctioneer and the highest bidder that the auction will be held without reserve (i.e., that the highest bid, however low, will be accepted). The U.S. Uniform Commercial Code provides that in an auction without reserve the goods may not be withdrawn once they have been put up.

Revocation of offer

An offeror may revoke an offer before it has been accepted, but the revocation must be communicated to the offeree, although not necessarily by the offeror. If the offer was made to the entire world, such as in Carlill's case, the revocation must take a form that is similar to the offer. However, an offer may not be revoked if it has been encapsulated in an option (see also option contract).

If the offer is one that leads to a unilateral contract, then unless there was an ancillary contract entered into that guaranteed that the main contract would not be withdrawn, the contract may be revoked at any time.

Acceptance

Test of acceptance

Acceptance is a final and unqualified expression of assent to the terms of an offer. It is no defense to an action based on a contract for the defendant to claim that he had not intended to be bound by the agreement, if his conduct demonstrated that he had. The essential

requirement is that the parties had each from a subjective perspective engaged in conduct manifesting their assent. Under this meeting of the minds theory of contract, a party could resist a claim of breach by proving that he had not intended to be bound by the agreement, only if it appeared subjectively that he had so intended. This is unsatisfactory, as one party has no way to know another's undisclosed intentions. One party can only act upon what the other party reveals objectively to be his intent. Hence, an actual meeting of the minds is not required. Indeed, it has been argued that the "meeting of the minds" idea is entirely a modern error: 19th century judges spoke of "consensus ad idem" which modern teachers have wrongly translated as "meeting of minds" but actually means "agreement to the [same] thing".

The requirement of an objective perspective is important in cases where a party claims that an offer was not accepted and seeks to take advantage of the performance of the other party. Here, we can apply the test of whether a reasonable bystander (a "fly on the wall") would have perceived that the party has impliedly accepted the offer by conduct.

Rules of acceptance

Communication of acceptance

There are several rules dealing with the communication of acceptance:

The acceptance must be communicated: see Powell v Lee (1908) 99 L.T. 284; Robophone Facilities Ltd v. Blank [1966] 3 All E.R. 128. Prior to acceptance, an offer may be withdrawn.

An exception exists in the case of unilateral contracts, in which the offeror makes an offer to the world which can be accepted by some act. A classic instance of this is the case of Carlill v. Carbolic Smoke Ball Co. [1892] 2 Q.B. 484 in which an offer was made to pay £100 to anyone who having bought the offeror's product and used it in accordance with the instructions nonetheless contracted influenza. The plaintiff did so and the court ordered payment of the £100. Her actions accepted the offer - there was no need to communicate acceptance. Typical cases of unilateral offers are advertisements of rewards (e.g., for the return of a lost dog).

An offer can only be accepted by the offeree, that is, the person to whom the offer is made.

An offeree is not usually bound if another person accepts the offer on his behalf without his authorisation, the exceptions to which are found in the law of agency, where an agent may have apparent or ostensible authority, or the usual authority of an agent in the particular market, even if the principal did not realise what the extent of this authority was, and someone on whose behalf an offer has been purportedly accepted it may also ratify the contract within a reasonable time, binding both parties: see agent (law).

It may be implied from the construction of the contract that the offeror has dispensed with the requirement of communication of acceptance (called waiver of communication - which is generally implied in unilateral contracts): see also Re Selectmove Ltd [1994] BCC 349.

If the offer specifies a method of acceptance (such as by post or fax), acceptance must be by a method that is no less effective from the offeror's point of view than the method specified. The exact method prescribed may have to be used in some cases but probably only where the

offeror has used very explicit words such as "by registered post, and by that method only": see Yates Building Co. Ltd v. R.J. Pulleyn & Sons (York) Ltd (1975) 119 Sol. Jo. 370.

Silence cannot be construed as acceptance: see Felthouse v. Bindley (1862) 142 ER 1037.[13]

However, acceptance may be inferred from conduct, see, e.g.: Brogden v. Metropolitan Railway Company (1877) 2 App. Cas. 666; Rust v. Abbey Life Assurance Co. Ltd [1979] 2 Lloyd's Rep. 334; Saint John Tugboat Co. v. Irving Refinery Ltd (1964) 46 DLR (2d) 1; Wettern Electric Ltd v. Welsh Development Agency [1983] Q.B. 796.

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Correspondence with offer

The "mirror image rule" states that if you are to accept an offer, you must accept an offer exactly, without modifications; if you change the offer in any way, this is a counter-offer that kills the original offer: Hyde v. Wrench (1840) 3 Beav 334. However, a mere request for information is not a counter-offer: Stevenson v. McLean (1880) 5 Q.B.D. 346. It may be possible to draft an enquiry such that it adds to the terms of the contract while keeping the original offer alive.

An offeror may revoke an offer before it has been accepted, but the revocation must be communicated to the offeree, although not necessarily by the offeror: Dickinson v. Dodds (1876) 2 Ch.D. 463. If the offer was made to the entire world, such as in Carlill's case, the revocation must take a form that is similar to the offer. However, an offer may not be revoked if it has been encapsulated in an option (see also option contract).

Battle of the forms

Often when two companies deal with each other in the course of business, they will use standard form contracts. Often these terms conflict (e.g. both parties include a liability waiver in their form) and yet offer and acceptance are achieved forming a binding contract. The battle of the forms refers to the resulting legal dispute of these circumstances, wherein both parties recognize that an enforceable contract exists, however they are divided as to whose terms govern that contract.

Under English law, the question was raised in Butler Machine Tool Co Ltd v. Ex-Cell-O Corporation (England) Ltd [1979] WLR 401, as to which of the standard form contracts prevailed in the transaction. Lord Denning MR preferred the view that the documents were to be considered as a whole, and the important factor was finding the decisive document; on the other hand, Lawton and Bridge LJJ preferred traditional offer-acceptance analysis, and considered that the last counter-offer prior to the beginning of performance voided all preceding offers. The absence of any additional counter-offer or refusal by the other party is understood as an implied acceptance. In U.S. law, this principle is referred to as the last shot rule.

Under the Uniform Commercial Code (UCC) Sec. 2-207(1), A definite expression of acceptance or a written confirmation of an informal agreement may constitute a valid acceptance even if it states terms additional to or different from the offer or informal agreement. The additional or different terms are treated as proposals for addition into the contract under UCC Sec. 2-207(2). Between merchants, such terms become part of the contract unless:

a) the offer expressly limits acceptance to the terms of the offer, b) material alteration of the contract results,

c) notification of objection to the additional/different terms are given in a reasonable time after notice of them is received.

Material is defined as anything that may cause undue hardship/surprise, or is a significant element of the contract.

If there is no contract under 2-207(1), then under UCC Sec. 2-207(3), conduct by the parties that recognize there is a contract may be sufficient to establish a contract. The terms for this contract include only those that the parties agree on and the rest via gap fillers.

Postal acceptance rule

As a rule of convenience, if the offer is accepted by post, the contract comes into existence at the moment that the acceptance was posted (Adams v. Lindsell (1818) 106 ER 250). This rule only applies when, impliedly or explicitly, the parties have in contemplation post as a means of acceptance. It excludes contracts involving land, letters incorrectly addressed and instantaneous modes of communication. The relevance of this early 19th century rule to modern conditions, when many quicker means of communication are available has been questioned, but the rule remains for the time being.

Knowledge of the offer

In Australian law, there is a requirement that an acceptance is made in reliance or pursuance of an offer: see R v. Clarke (1927) 40 C.L.R. 227.

Rejection, death or lapse of time

An offer can be terminated on the grounds of rejection on the part of the offeree, that is if the offeree does not accept the terms of the offer.Also upon making an offer,an offeror may include as a condition to the contract the duration in which the offer will be available.If the offeree fails to accept the offer within this specific period then the offer will be deemed as terminated.

Death of offeror

Generally death (or incapacity) of the offeror terminates the offer. This does not apply to option contracts.

The offer cannot be accepted if the offeree knows of the death of the offeror. In cases where the offeree accepts in ignorance of the death, the contract may still be valid, although this proposition depends on the nature of the offer. If the contract involves some characteristic personal to the offeror, the offer is destroyed by the death.

Death of offeree

An offer is rendered invalid upon the death of the offeree: see Re Irvine.

Counter Offers

If the offeree rejects the offer, the offer has been destroyed and cannot be accepted at a future time. A case illustrative of this is Hyde v. Wrench (1840) 49 E.R. 132, where in response to an offer to sell an estate at a certain price, the plaintiff made an offer to buy at a lower price. This offer was refused and subsequently, the plaintiffs sought to accept the initial offer. It was held that no contract was made as the initial offer did not exist at the time that the plaintiff tried to accept it, the offer having been terminated by the counter offer.

It should be noted that a mere inquiry (about terms of an offer) is not a counter offer and leaves the offer intact. The case Stevenson v. McLean (1880) 28 W.R. 916 is analogous to this situation.

Formation

A contract will be formed (assuming the other requirements are met) when the parties give objective manifestation of an intent to form the contract. Of course, the assent must be given to terms of the agreement. Usually this involves the making by one party of an offer to be bound upon certain terms, and the other parties' acceptance of the offer on the same terms.

Because offer and acceptance are necessarily intertwined, in California, offer and acceptance are analyzed together as subelements of a single element, known either as consent of the parties or mutual assent.

Criticisms

Criticisms of offer-acceptance analysis lie in that this tool was created by legal academics and can be rather arbitrary at times, and bears little resemblance to how lay-people perceive the formation of a contract.

Invitation to treat

Where a product in large quantities is advertised in a newspaper or on a poster, it generally is not considered an offer but instead will be regarded as an invitation to treat, since there is no guarantee that the store can provide the item for everyone who might want one. This was the basis of the decision in Partridge v. Crittenden a criminal case in which the defendant was charged with "offering for sale" bramblefinch cocks and hens. The court held that the newspaper advertisement could only be an invitation to treat, since it could not have been intended as an offer to the world, so the defendant was not guilty of "offering" them for sale. Similarly, a display of goods in a shop window is an invitation to treat, as was held in Fisher v. Bell another criminal case which turned on the correct analysis of offers as against invitations to treat. In this instance the defendant was charged with "offering for sale" prohibited kinds of knife, which he had displayed in his shop window with prices attached. The court held that this was an invitation to treat, the offer would be made by a purchaser going into the shop and asking to buy a knife, with acceptance being by the shopkeeper, which he could withhold. (The law was later amended to "exposing for sale".) A display of goods on the shelves of a self-service shop is also an invitation to treat, with the offer being made by the purchaser at the checkout and being accepted by the shop assistant operating the checkout: Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd. If the person who is to buy the advertised product is of importance, for instance because of his personality, etc., when buying land, it is regarded merely as an invitation to treat. In Carbolic Smoke Ball, the major difference was that a reward was included in the advertisement, which is a general exception to the rule and is then treated as an offer.

The Carbolic Smoke Ball offer

One of the most famous cases on invitation to treat is Carlill v. Carbolic Smoke Ball Company, decided in nineteenth-century England. A medical firm advertised that its new wonder drug, a smoke ball, would prevent those who used it according to the instructions from catching the flu, and if it did not, buyers would receive £100 and said that they had deposited £1,000 in the bank to show their good faith. When sued, Carbolic argued the ad was not to be taken as a serious, legally binding offer. It was merely an invitation to treat, and a gimmick (a 'mere puff'). But the court of appeal held that it would appear to a reasonable man that Carbolic had made a serious offer, primarily because of the reference to the £1000 deposited into the bank. People

had given good "consideration" for it by going to the "distinct inconvenience" of using a faulty product. "Read the advertisement how you will, and twist it about as you will," said Lindley LJ, "here is a distinct promise expressed in language which is perfectly unmistakable".

Consideration and estoppel

Consideration is known as 'the price of a promise' and is a requirement for contracts under common law. The idea behind consideration is that both parties to a contract must bring something to the bargain. A party seeking to enforce a contract must show that it conferred some benefit or suffered some detriment (though it might be trivial, see below) that is recognized by law. For example, money is often recognized as consideration, but in some cases money will not suffice as consideration (for example, when one party agrees to make partial payment of a debt in exchange for being released from the full amount).[17]

Some common-law and civil-law systems[18] do not require consideration, and some commentators consider it unnecessary—the requirement of intent by both parties to create legal relations by both parties performs the same function under contract. The reason that both exist in common law jurisdictions is thought by leading scholars to be the result of the combining by 19th century judges of two distinct threads: first the consideration requirement was at the heart of the action of assumpsit, which had grown up in the Middle Ages and remained the normal action for breach of a simple contract in England & Wales until 1884, when the old forms of action were abolished; secondly, the notion of agreement between two or more parties as being the essential legal and moral foundation of contract in all legal systems, promoted by the 18th century French writer Pothier in his Traite des Obligations, much read (especially after translation into English in 1805) by English judges and jurists. The latter chimed well with the fashionable will theories of the time, especially John Stuart Mill's influential ideas on free will, and got grafted on to the traditional common law requirement for consideration to ground an action in assumpsit.

Although several rules govern consideration, the following are the principal rules.

Consideration must be "sufficient" (i.e., recognizable by the law), but need not be "adequate" (i.e., the consideration need not be a fair and reasonable exchange for the benefit of the promise). For instance, agreeing to sell a car for a penny may constitute a binding contract.

Consideration must not be from the past. For instance, in Eastwood v. Kenyon, the guardian of a young girl obtained a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise because taking out the loan to raise and educate the girl was past consideration—it was completed before the husband promised to repay it.

Consideration must move from the promisee. For instance, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promisees, then consideration need only to move from one of the promisees.

The promise to do something one is already contractually obliged to do is not, traditionally, regarded as good consideration. The classic instance is Stilk v. Myrick, in which a captain's promise to divide the wages of two deserters among the remaining crew if they would sail home from the Baltic short-handed, was found unenforceable on the grounds that the crew were already contracted to sail the ship through all perils of the sea. (The case has been much criticized on grounds that the ship was in port at the time of the promise.) A very specific example is the "rule in Pinnel's Case"\brought into the modern law of consideration by the House of Lords in Foakes v. Beer\. This rule is to the effect that a smaller sum of money cannot be good consideration for the release of a larger debt, though if the smaller sum is accompanied by something non-monetary in addition, for instance "a horse, a hawk or a robe", or payment is to be made early or in some special place or way, then there will be good consideration for the promise to discharge the debt. This rule has suffered some inroads recently. In Williams v. Roffey Bros & Nicholls (Contractors) Ltd the English Court of Appeal held that a promise by a joiner to complete the contracted work on time, where this was falling behind, was good consideration for the contractor's promise to pay extra money. The reasoning adopted was that the strict rule of Stilk v. Myrick was no longer necessary, as English law now recognized a doctrine of economic duress to vitiate promises obtained when the promisor was "over a barrel" for financial reasons. Therefore, where the promise to pay extra could be seen as conferring a practical benefit on the promisor, that could be good consideration for a variation of the terms. The rule in Pinnel's Case has also been effectively sidestepped in England by the Court of Appeal in the case of Collier v. P & MJ Wright (Holdings) Ltd which held that a promise to accept less in discharge of a pure debt (as opposed to, say, accepting reduced rent, which has long been recognized) could give rise to a promissory estoppel.

The promise must not be to do something one is already obliged by the general law to do - e.g., to give refrain from crime or to give evidence in court: Collins v. Godefroy.

However, a promise from A to do something for B if B will perform a contractual obligation B owes to C, will be enforceable - B is suffering a legal detriment by making his performance of his contract with A effectively enforceable by C as well as by A.

Civil law systems take the approach that an exchange of promises, or a concurrence of wills alone, rather than an exchange in valuable rights is the correct basis. So if you promised to give me a book, and I accepted your offer without giving anything in return, I would have a legal right to the book and you could not change your mind about giving me it as a gift. However, in common law systems the concept of culpa in contrahendo, a form of 'estoppel', is increasingly used to create obligations during pre-contractual negotiations Estoppel is an equitable doctrine that provides for the creation of legal obligations if a party has given another an assurance and

the other has relied on the assurance to his detriment. A number of commentators have suggested that consideration be abandoned, and estoppel be used to replace it as a basis for contracts. However, legislation, rather than judicial development, has been touted as the only way to remove this entrenched common law doctrine. Lord Justice Denning famously stated that "The doctrine of consideration is too firmly fixed to be overthrown by a side-wind."

Invitation to treatInvitation to treat (or invitation to bargain in the United States) is a contract law term. It comes from the Latin phrase invitatio ad offerendum and means an "inviting an offer". Or as Andy Burrows writes, an invitaton to treat is

"an expression of willingness to negotiate. A person making an invitation to treat does not intend to be bound as soon as it is accepted by the person to whom the statement is addressed."[1]

Contract lawyers distinguish this from a binding offer, which can be accepted to form a contract (subject to other conditions being met). The distinction between an offer and invitation to treat is best understood through the categories that the courts create. Invitations to treat include the display of goods; the advertisement of a price or an auction; and an invitation for tenders (or competitive bids). There may however be statutory or complementary obligations, so consumer protection laws prohibit misleading advertising and at auctions without reserve there is always a duty to sell to the highest bona fide bidder. But the general rule is that unlike an actual offer, an invitation to treat is not binding. The "inviter" can change his or her mind.

Case law

The clearest example of an invitation to treat is a tender (or bidding in the U.S.) process. This was illustrated in the case of Spencer v Harding (1870) LR 5 CP 561, where the defendants offered to sell by tender their stock and the court held that they had not undertaken to sell to the person who made the highest tender, but were inviting offers which they could then accept or reject as they saw appropriate. In certain circumstances though, an invitation for tenders may be an offer. The clearest example of this was seen in Harvela Investments Ltd v Royal Trust of Canada (CI) Ltd [1986] AC 207, where the defendants had made it clear that they were going to accept the highest tender; the court held that this was an offer which was accepted by the person who made the highest tender and that the defendants were in breach of contract by not doing so.

An auction may be more ambiguous. Generally an auction may be seen as an invitation to treat, with the property owner asking for offers of a certain amount and then selecting which to accept as illustrated in Payne v Cave (1789) 3 TR 148. However, if it is stated by the owner that there is no reserve price or that there is a reserve price beyond which offers will be accepted

then the auction is most likely a contractual offer which is accepted by the highest bidder; this was affirmed in the Appellate court in Barry v Davies [2000] 1 WLR 1962.

A shop owner displaying their goods for sale is generally making an invitation to treat (Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401). They are not obliged to sell the goods to anyone who is willing to pay for them, even if additional signage such as "special offer" accompanies the display of the goods. (But see bait and switch.) This distinction was legally relevant in Fisher v Bell [1961] 1 QB 394, where it was held that displaying a flicknife for sale in a shop did not contravene legislation which prohibited offering for sale such a weapon. The distinction also means that if a shop mistakenly displays an item for sale at a very low price it is not obliged to sell it for that amount.

Generally, advertisements are invitations to treat, so the person advertising is not compelled to sell to every customer. In Partridge v Crittenden [1968] 1 WLR 1204, it was held that where the appellant advertised to sell wild birds, was not offering to sell them. Lord Parker CJ commented that it did not make "business sense" for advertisements to be offers, as the person making the advertisement may find himself in a situation where he would be contractually obliged to sell more goods than he actually owned. In certain circumstances however, an advertisement can be an offer, a well known example being the case of Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256, where it was held that the defendants, who advertised that they would pay anyone who used their product in the prescribed manner and caught influenza £100 and said that they had deposited £1,000 in the bank to show their good faith, has made an offer to the whole world and were contractually obliged to pay £100 to whoever accepted it by performing the requested acts.

Consideration is the legal concept of value in connection with contracts. It is anything of value in the common sense, promised to another when making a contract. It can take the form of money, physical objects, services, promised actions, abstinence from a future action and much more. Under the notion of "pre-existing duties," if either the promisor or the promisee already had a legal obligation to render such payment, it cannot be seen as consideration in the legal sense.

In common law it is a prerequisite that both parties offer some consideration before a contract can be thought of as binding.

However, even if a court decides there is no contract, there might be a possible recovery under Quantum meruit (sometimes referred to as a Quasi-contract) or promissory estoppel.

Basic examples of consideration

If A signs a contract to buy a car from B for $5,000, A's consideration is the $5,000, and B's consideration is the car.

Additionally, if A signs a contract with B such that A will paint B's house for $500, A's consideration is the service of painting B's house, and B's consideration is $500 paid to A.

Further, if A signs a contract with B such that A will not repaint his own house in any other color than white, and B will pay A $500 per year to keep this deal up, there is also consideration. Although A did not promise to affirmatively do anything, A did promise not to do something that he was allowed to do, and A therefore did pass consideration. A's consideration to B is the forbearance in painting his own house in a color other than white, and B's consideration to A is $500 per year.

This form of consideration is often seen in settlements. B committed a tort against A, causing $5,000 in compensatory damages and $3,000 in punitive damages. Since there is no guarantee that A would win against B if it went to court, A will agree to drop the case if B pays the $5,000 compensatory damages. This is sufficient consideration, since B's consideration is a guaranteed recovery, and A's consideration is that B only has to pay $5,000, instead of $8,000.

Conversely, if A signs a contract to buy a car from B for $0, B's consideration is still the car, but A is giving no consideration, and so there is no valid contract. However, if B still gives the title to the car to A, then B cannot take the car back, since, while it may not be a valid contract, it is a valid gift.

There are a number of common issues as to whether consideration exists in a contract.

Value of consideration

Generally, courts do not inquire whether the deal between two parties was monetarily fair - merely that each party passed some legal obligation or duty to the other party. The court is more concerned about the presence of consideration rather than the adequacy of the consideration.

The values between consideration passed by each party to a contract need not be comparable. For instance, if A offers B $200 to buy B's mansion, luxury sports car, and private jet, there is still consideration on both sides. A's consideration is $200, and B's consideration is the mansion, car, and jet. Courts in the United States generally leave parties to their own contracts, and do not intervene when parties knowingly make bad deals.

Nominal consideration

Although courts in the United States tend not to look at the value of consideration, there is one exception.

The old English rule of consideration questioned whether a party gave the value of a peppercorn to the other party. As a result, contracts in the United States have sometimes have had one party pass nominal amounts of consideration, typically citing $1. Some courts have since thought this was a sham. Since contract disputes are typically resolved in state court, some state courts have found that providing $1 to another is not a sufficiently legal duty, and therefore no legal consideration passes in these kinds of deals, and subsequently, no contract is formed.

Still today, licensing contracts that do not involve any money at all will often cite as consideration, "for the sum of $1 and other good and valuable consideration". If analyzed under state law, these contracts may very well be found invalid.

Pre-existing legal duties

A party which already has a legal duty to provide money, an object, a service, or a forbearance, does not provide consideration when promising merely to uphold that duty.

The prime example of this sub-issue is where an uncle gives his 17 year old nephew (a resident of the USA) the following offer: "if you do not smoke cigarettes or marijuana until your 18th birthday, then I will pay you $500" (it is a criminal offense in most states in the US for people under the age of 18 to smoke). On the nephew's 18th birthday, he tells the uncle to pay up, and the uncle says no. In the subsequent lawsuit, the uncle will win, because the nephew, by U.S. law, already had a duty to refrain from smoking cigarettes.

The same applies if the consideration is a performance for which the parties had previously contracted. For example, A agrees to paint B's house for $500, but halfway through the job tells B that he will not finish unless B increases the payment to $750. If B agrees, and A then finishes the job, B still only needs to pay A the $500 originally agreed to, because A was already contractually obligated to paint the house for that amount.

However, one exception to pre-existing legal duties is when the duties are at-will, such as with at-will employment. When a legal duty can be discharged at any time, without notice, a mere promise to not discharge that duty is sufficient consideration. For example, if a valuable employee demands a wage increase, it is sufficient consideration that he will not simply quit his job if the wage increase is met, even though he was already under contract to work for that company.

Bundled terms

Contracts where a legally valueless term is bundled with a term that does have legal value are still generally enforceable.

Consider the uncle's situation above. If the same uncle had instead told his 17 year old nephew the following offer: "if you do not smoke cigarettes and do not engage females before your 18th birthday, then I will pay you $500". On the nephew's 18th birthday, he asks the uncle to pay up, and this time, in the subsequent lawsuit, the nephew will win. Although the promise of not smoking was not valuable consideration (it was already legally prohibited), virtually all states allow some sort of engagement by minors. Even though the engagement by minors is legally restricted, there are circumstances where it is legal, and thus the promise to forbear from it entirely has legal value. However, the uncle would still be relieved from the liability if his nephew smoked a joint, even though that consideration is valueless, because it was paired with something of legal value; therefore, adherence to the entire, collective agreement is necessary.

Past consideration

Generally, past consideration has no legal value. Past consideration therefore cannot be used as a basis to form a new contract.

Suppose A is driving in his car on a sunny Sunday afternoon, and he sees smoke coming from a vehicle on the side of the road ahead. A pulls over, sees B injured in the vehicle, and pulls B out of the car to safety. B makes a full recovery, and the next day, says to A, "because you saved me, I will pay you $5,000 per year until you die." Five years later, B dies of cancer and even though B paid A $5,000 each of those years, the executor of B's estate refuses to pay A any more money. In the subsequent lawsuit, A will lose, because no contract existed. At the time that B took up this $5,000 per year obligation, A did not offer any consideration. Applying the "value of consideration" rule, A might actually win if A had merely replied, "I will only accept, if you require that I do not walk backwards on Tuesdays between 4:00pm and 4:10pm EST while holding a red pen". Even though A's consideration has little monetary value to pretty much anyone, it does have legal value, as it is a promise of forbearance.

Option contracts and conditional consideration

There are three types of consideration. Generally, conditional consideration is valid consideration.

Consider the following situation. A is a movie script writer. B runs a movie production company. A says to B, "buy my script." Instead, B says "How about this -- I will pay you $5,000 so that you do not let anyone else produce your movie until one year from now. If I do produce your movie in that year, then I will give you another $50,000, and no one else can produce it. If I do not produce your movie in that year, then you're free to go." If the two subsequently get into a

dispute, the issue of whether a contract exists is answered. B had an option contract -- he could decide to produce the script, or not. B's consideration passed was the $5,000 down, and the possibility of $50,000. A's consideration passed was the exclusive rights to the movie script for at least one year.

Treatments by different legal systems

Consideration under English law Consideration under American law

Consideration in English lawConsideration is one of the three main building blocks of a contract in English contract law. Consideration can be anything of value (such as an item or service), which each party to a legally-binding contract must agree to exchange if the contract is to be valid. If only one party offers consideration, the agreement is not legally a binding contract. In its traditional form, consideration is expressed as the requirement that in order for parties to be able to enforce a promise, they must have given something for it (quid pro quo): something must be given or promised in exchange or return for the promise. A contract must be "met with" or "supported by" consideration to be enforceable; also, only a person who has provided consideration can enforce a contract. In other words, if an arrangement consists of a promise which is not supported by consideration, then the arrangement is not a legally enforceable contract. Mutual promises constitute consideration for each other. ("I promise you to do X, in consideration for which promise you promise me to do Y").

In Australia, the bargain theory of consideration prevails, where the act or forebearance of one party or promise thereof is the price for which a promise is bought.

Definition

Consideration for a particular promise exists where some right, interest, profit or benefit accrues (or will accrue) to the promisor as a direct result of some forbearance, detriment, loss or responsibility that has been given, suffered or undertaken by the promisee. The consideration must be executory or executed, but not past.

Consideration is executory when a promise to do something in the future is given in exchange for another promise to be done in the future. Consideration is executed when a promise is actually executed, in exchange for another promise to be executed in the future. Consideration is past when a promise has been given or executed before and independently of the other promise. For example, I promised to take you to lunch, and then when we got there I said "you must pay, because I have given you the benefit of my company" This is past consideration and therefore NO consideration.

Consideration can be anything of value (such as an item or service), which each party to a legally-binding contract must agree to exchange if the contract is to be valid. If only one party offers consideration, the agreement is not legally a binding contract. In its traditional form, consideration is expressed as the requirement that in order for parties to be able to enforce a promise, they must have given something for it (quid pro quo): something must be given or promised in exchange or return for the promise. A contract must be "met with" or "supported by" consideration to be enforceable; also, only a person who has provided consideration can enforce a contract. In other words, if an arrangement consists of a promise which is not supported by consideration, then the arrangement is not a legally enforceable contract. Mutual promises constitute consideration for each other. ("I promise you to do X, in consideration for which promise you promise me to do Y").

In Australia, the bargain theory of consideration prevails, where the act or forebearance of one party or promise thereof is the price for which a promise is bought.

Dyer's case Currie v. Misa (1875) LR 10 Ex 153, 162

Consideration need not be adequate

For consideration to be good consideration, it must be of some value, even if it is minimal value. There is no requirement that the consideration be commensurate in economic terms to the original promise.

Nominal consideration will suffice as good consideration for a contract, Courts will not measure the adequacy of the consideration as it is up to the parties to decide the subjective worth of each promise.

Thus consideration can come in any forms, A hawk, a horse or a robe.* Even a peppercorn would be sufficient

Chappell & Co Ltd v. Nestle Co Ltd [1960] AC 87 "Pinnels Case"

Consideration must be sufficient

Past Consideration

A promise cannot be based upon consideration that was provided before the promise was made. For example, if X promises to reward Y for an act that Y had already performed, the

performance of that act, while good consideration for the promise to be rewarded for it, is past consideration and therefore not good consideration.

In Eastwood v Kenyon, the guardian of a young girl raised a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise as taking out the loan to raise and educate the girl was past consideration, because it was completed before the husband promised to repay it.

Furthermore, where a contract exists between two parties and one party, subsequent to formation, promises to confer an additional benefit on the other party to the contract, that promise is not binding because the promisee's consideration, which is his entry into the original contract, had already been completed (or "used") at the time the next promise is made.

In Roscorla v Thomas, Roscorla and Thomas contracted to buy a horse for £30. After the sale, Thomas promised Roscorla that the horse was sound; the horse turned out to be vicious. It was held that Roscorla could not enforce the promise, as the consideration given for entering into the contract to buy the horse had been completed by the time the promise was made; in a sense, the consideration was "used up".

The rule that past consideration is not good consideration is subject to the exception discussed by the Privy Council in Pao On v Lau Yiu Long [1980] AC 614. In that case, their Lordships held that past consideration can be good consideration where:

1. The promisee performed the original act at the request of the promisor;2. It was clearly understood or implied between the parties that the promisee would be rewarded

for the performance of the act;

3. The actual promise made, if made before the promisee provided the consideration, must be capable of being enforced, in other words giving rise to a legally binding contract.

Illusory Consideration

There must be some kind of connection between a promise and the consideration offered to support the promise. It is no consideration to "refrain from a course of conduct which it was never intended to pursue" (Arrale v. Costain Civil Engineering Ltd [1976] 1 Lloyd's Rep 98). The consideration must have been at least an inducement to enter into the promise.

This requirement also imposes a restriction on conditional gifts. This test is an objective test - whether a reasonable person in the position of the offeree would perceive it as a gift as opposed to an offer. For example, the payment of $10,000 for the switching of a television channel is not met with consideration.

Certainty

Consideration is sufficient where it amounts to something that is capable of expression in economic terms. In White v Bluett (1853) 23 LJ Ex 36, Bluett, when sued by his father’s executors for an outstanding debt to his father, claimed that his father had promised to discharge him from it in return for him stopping complaining about property distribution. The Court held that the cessation of complaints was of no economic value; thus, Bluett’s father had received no real consideration for the promise, and the debt was enforceable at law.

Consideration must move from the promisee

A promise is enforceable if it is supported by consideration, that is, where consideration has moved from the promisee. For example, in the case of Tweddle v. Atkinson, John Tweddle promised William Guy that he would pay a sum of money to the child of William Guy, and likewise William Guy promised John Tweddle that he would pay a sum of money to the child of John Tweddle, upon the marriage of the two children to each other. However, William Guy failed to pay the son of John Tweddle, who then sued his executors for the amount promised. It was held that the son could not enforce the promise made to his father, as he himself had not actually given consideration for it - it was his father who had done so instead.The son did´t show any consideration, so he cannot enforce the promise. This particular rule of consideration forms the basis of the doctrine of privity of a contract, that is, only a party to a contract is permitted to sue upon that contract's terms. (Note that the doctrine of privity has been somewhat altered by the Contracts (Rights of Third Parties) Act 1999.) Therefore consideration from the promisee was indulgent of the claim. Although consideration must move from the promisee, it does not necessarily have to move to the promisor. The promisee may provide consideration to a third party, if this is agreed at the time the parties contracted (see Bolton v. Madden).

Tweddle v. Atkinson (1861) 1 B&S 393; 121 ER 762

The offeree must provide consideration, although the consideration does not have to flow to the offeror. For example, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promisees, then consideration need only to move from one of the promisees. (see Price v Easton)

Promised performance of existing duty

If the promisee provides what he was required by public law to do in any event in return for a promise, promised performance of existing duty is not good consideration. In Collins v. Godefrey Godefrey promised to pay Collins for his giving of evidence. It was held that Collins could not enforce the promise as he was under a statutory duty to give evidence in any event.

However, if the promisee provides more than what public duty imposes on him, then this is good consideration. In Ward v. Byham a mother was under a statutory duty to look after her child. The ex-husband promised to pay her £1 a week if she ensured that the child was well looked after and happy. It was held that notwithstanding the statutory duty imposed on the

mother, she could enforce the promise since the act of keeping the baby 'happy' provided additional consideration.

Glasbrook Ltd v. Glamorgan County Council [1925] AC 270

Duty to the contracting party

Promising to perform a pre-existing duty owed to one's contracting party also fails to make good consideration. However this rule has been considerably narrowed by recent case law. The general rule is that if a creditor promises to discharge a debt in return for a fraction of payment, in paying the agreed fraction, the promisee is not providing consideration for the promise, as this is merely part performance of a contractual duty already owed (see Pinnel's Case; confirmed by Foakes v. Beer). Consequently, the debtor is still liable for the whole amount, as he cannot force the promisor to accept less. A leading example is in Stilk v. Myrick. Stilk, a seaman, agreed with Myrick to sail his boat to the Baltic Sea and back for £5 per month. During the voyage, two men deserted. Myrick promised he would increase Stilk's wages if Stilk agreed to honour his contract in light of the desertions. Stilk agreed and on return to port, Myrick refused to pay him the extra wages. It was held that Myrick's fresh promise was not enforceable as the consideration Stilk had provided for it, the performance of a duty he already owed to Myrick under contract, was not good consideration for Myrick's promise to increase his wages.

Initially, there were only two exceptions to this rule:

Hanson v. Royden, the promisee has done, or has promised to do, more than he was obliged to do under his contract.

Hartley v. Ponsonby, before the fresh promise was made, circumstances had arisen which would have entitled the promisee to refuse to carry out his obligations under his contract.

However, the strictness of this rule was severely limited in Williams v. Roffey Bros & Nicholls (Contractors) Ltd. The Roffey Brothers entered into a contract to refurbish a block of flats for a fixed price of £20,000. They sub-contracted carpentry work to Williams. It became apparent that Williams was threatened by financial difficulties and would not be able to complete his work on time. This would have breached a term in the main contract, incurring a penalty. Roffey Brothers offered to pay Williams an additional £575 for each flat completed. Williams continued to work on this basis, but soon it became apparent that Roffey Brothers were not going to pay the additional money. He ceased work and sued Roffey Brothers for the extra money, for the eight flats he had completed after the promise of additional payment. The Court of Appeal held that Roffey Brothers must pay Williams the extra money, as they had enjoyed practical benefits from the promise they had made to Williams. The benefits they received from it include: Having the work completed on time, not having to spend money and time seeking another carpenter and not having to pay the penalty. In the circumstances, these benefits were sufficient to provide consideration for the promise made to Williams of additional payment. It now seems that the performance of an existing duty may constitute consideration for a new

promise, in the circumstances where no duress or fraud are found and where the practical benefits are to the promisor. The performance of an existing contractual duty owed to the promisor is not good consideration for a fresh promise given by the promisor. However, performance of an existing contractual duty owed to a third party can be good consideration, see further below.

According to the Court of Appeal, it is unlikely that either avoiding a breach of contract with a third party, avoiding the trouble and expense of engaging a third party to carry out work or avoiding a penalty clause in a third party contract will be a "practical benefit". In Simon Container Machinery Ltd v. Emba Machinery AB, the practical benefit was held to be the avoiding of a breach of contract, which was clearly not an extension of the principle.

This is true unless the debtor provided fresh consideration for the promise. The following, mentioned in Pinnel's Case itself and confirmed by Sibree v. Tripp, may amount to fresh consideration:

1. If the promisee offers part payment earlier than full payment was due, and this is of benefit to the creditor;

2. If the promisee offers part payment at a different place than where full payment was due, and this is of benefit to the creditor; or,

3. If the promisee pays the debt in part by another chattel (note, however, that part payment by cheque, where full payment was due by another means, is not consideration (see D & C Builders Ltd v. Rees)).

Another exception is that part payment of the debt by a third party as consideration for a promise to discharge the creditor from the full sum, prevents the creditor then suing the debtor for full payment (see Welby v Drake).

The Court of Appeal, in Re Selectmove Ltd stated that the practical benefit doctrine arising from Williams v Roffey cannot be used as an additional exception to the rule. In that case, it was held that the doctrine only applies where the original promise was a promise to pay extra and not to pay less. It should be noted, however, that the Court of Appeal in Re Selectmove were unable to distinguish Foakes v. Beer (a House of Lords decision), in order to apply Williams v Roffey (Court of Appeal). It therefore remains to be seen whether the House of Lords would decide this point differently. In any event, the equitable principle of promissory estoppel may provide the debtor with relief.

Atlas Express Ltd v. Kafco [1989] QB 833

To third party

Consideration for a promise can be the performance of a contractual duty owed to someone other than the promisor (see Shadwell v Shadwell; confirmed by The Eurymedon). In Shadwell, Shadwell was under a contractual duty with a third party to marry. Shadwell’s uncle promised

to pay him £150 per year after he was married. It was held that Shadwell marrying was good consideration, notwithstanding that he was obliged by a contract with a third party to marry in any event.

Consideration under American law

Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a promise, the doing of an act, or even refraining from doing an act. In broad terms, if one agrees to do something he was not otherwise legally obligated to do, it may be said that he has given consideration. For example, Jack agrees to sell his car to Jill for $100. Jill's payment of $100 (or her promise to do so) is the consideration for Jack's promise to give Jill the car.

Elements of consideration

In order to meet consideration's requirements, a contract must fulfill three elements. First, there must be a bargain regarding terms of an exchange. Second, there must be a mutual exchange. In other words, both parties must get something out of the contract. Third, the exchange must be something of value.

An example of this is the renting of an apartment. The landlord and tenant come together to discuss the terms of the exchange (most of the time, the leasing is outlined in a contract). Thus, they have fulfilled the first requirement of consideration. To meet the second element, there must be a mutual exchange. In this case, the landlord provides housing, while the tenant provides rent payment. Third, the bargain terms must be of value. The apartment is worth what the tenant hands over each month. Therefore, this contract has met its consideration requirement, because it fits all elements of consideration.

Lack of Consideration

Past consideration is not valid. Something that is already done is done, and it does not change the legal position of the promisor. Any goods or services to be exchanged must be exchanged at or after the time of contract formation.

Preexisting duty does not count as consideration.

An illusory promise, or one which the promisor actually has no obligation to keep, does not count as consideration. The promise must be real and unconditional. This doctrine rarely invalidates contracts; it is a fundamental doctrine in contract law that courts should try to enforce contracts whenever possible. Accordingly, courts will often read implied-in-fact or implied-in-law terms into the contract, placing duties on the promisor. For instance, if a promisor promises to give away a third of his earnings for the year and earns nothing, he has no actual obligation to do anything.

Exceptions to the Consideration Requirement

Modern contract theory has also permitted remedies on alternative theories such as promissory estoppel. Also, charitable pledges are enforceable without consideration as are contracts under seal. Furthermore a promise to perform a moral obligation—the classic example is of a promise to support a person injured while coming to the rescue of the promisor—is enforceable provided the promissee was harmed in conferring a benefit on the promisor and the promise is not disproportionate to the benefit. The promise to pay a debt discharged by bankruptcy, the promise to perform a conditional responsibility despite the nonoccurrence of the condition, and the promise to perform on a voidable contract form a category of moral obligations that can bind in the absence of consideration.

Contract modification

Service contracts and, in the United States, other contracts not governed by the Uniform Commercial Code, generally require consideration for to modify a contract (because of what is called the preexisting duty rule).

Theories of Consideration

There are two common theories that attempt to explain consideration. The first is the "benefit-detriment theory", in which a contract must be either to the benefit of the promisor or to the detriment of the promisee to constitute consideration (though detriment to the promisee is the essential and invariable test of the existence of a consideration rather than it can be constituted by benefit to the promisor). The second is the "bargain theory", in which the parties subjectively view the contract to be the product of an exchange or bargain. The bargain theory has largely replaced the benefit-detriment theory in modern contract theory, but judges often cite both and unknowingly confuse the two models in their decisions. These theories usually overlap; in standard contracts, such as a contract to buy a car, there will be both an objective benefit and detriment (the buyer experiences a benefit by acquiring the car; the seller experienced a detriment by losing a car) and the subjective experience of entering into a bargain. However, there are certain contracts which satisfy one but not the other. For instance, a deal in which the promisee feels subjectively relieved, but hasn't actually gained any legal

rights, might satisfy the bargain theory but not the benefit-detriment theory. Alternately, a deal in which an actor takes detrimental actions possibly in reaction to an offer, without having viewed the deal as a bargain, wouldn't be viewed as a contract under the law.

The main purpose of the shift from benefit-detriment to bargain theory is to avoid inquiries into whether consideration is adequate. For example, if a person promised you their car for $1.00 because they needed to get rid of it, then the $1.00 might seem adequate. However, if it were your birthday and your friend wrote down "I give you my car in consideration of one dollar," this same consideration would not seem adequate. Thus whether $1.00 is consideration does not depend on the benefit received but whether the $1.00 had actually been bargained for.

In some jurisdictions, contracts calling for such nominal or "peppercorn" consideration will be upheld unless a particular contract is deemed unconscionable. However, in other jurisdictions, the court will reject "consideration" that had not been truly bargained for. Occasionally the courts in these jurisdictions may refer to "adequate" or "valuable" consideration, but in reality the court is not examining the adequacy of consideration, but whether it had been bargained for. The traditional notion that courts won't look into the adequacy of consideration, an ancient notion in the English common law, doesn't square with the benefit-detriment theory (in which courts are implicitly analyzing if the parties are receiving a sufficient benefit) but does square with the bargain theory (in which only the subjective intentions of the parties are considered).

There are three main purposes cited for the consideration requirement. The first is the cautionary requirement - parties are more likely to look before they leap when making a bargain than when making an off-the-cuff promise of a gift. The second is the evidentiary requirement - parties are more likely to commemorate, or at least remember, a promise made due to a bargaining process. The third is the channeling requirement - parties are more likely to coherently stipulate their specific desires when they are forced to bargain for them. Each of these rationales ensure that contracts are made by serious parties and are not made in error.

EstoppelEstoppel in its broadest sense is a legal term referring to a series of legal and equitable doctrines that preclude "a person from denying or asserting anything to the contrary of that which has, in contemplation of law, been established as the truth, either by the acts of judicial or legislative officers, or by his own deed, acts, or representations, either express or implied."

This term appears to come from the Old French estoupail (or a variation), which meant "stopper plug", referring to placing a halt on the imbalance of the situation. The term is related to the verb "estop" which comes from the Old French term estopper, meaning "stop up, impede".

Overview

Where a court finds that a party has done something warranting a form of estoppel, that party is said to be "estopped" from making certain related arguments or claiming certain related rights. The defendant is said to be "estopped" from presenting the related defense, or the plaintiff is said to be "estopped" from making the related argument against the defendant. Lord Coke stated, "It is called an estoppel or conclusion, because a man's own act or acceptance stoppeth or closeth up his mouth to allege or plead the truth."

Because estoppel is so factually dependent, it is perhaps best understood by considering specific examples.

Example 1: A city entered into a contract with another party. The contract stated that it had been reviewed by the city's counsel and that the contract was proper. Promissory estoppel applied to estop the city from claiming the contract was invalid.

Example 2: The creditor unofficially informs the debtor that the creditor forgives the debt. Even if such forgiveness is not formally documented, the creditor may be estopped from changing its mind and seeking to collect the debt, because that change would be unfair.

Example 3: A landlord informs a tenant that rent has been reduced, for example, because there was construction or a lapse in utility services. If the tenant relies on this notice in choosing to remain in the premises, the landlord could be estopped from collecting the full rent.

Estoppel is closely related to the doctrines of waiver, variation, and election and is applied in many areas of law, including insurance, banking, employment, international trade, etc.[citation

needed] In English law, the concept of legitimate expectation in the realm of administrative law and judicial review is estoppel's counterpart in public law, although subtle but important differences exist.

Major types

The main species of estoppel under English, Australian, and American laws are:

Reliance-based estoppels—These involve one party relying on something the other party has done or said. The party who did/said the act is the one who is estopped. Under English law, this class includes estoppel by representation of fact, promissory estoppel and proprietary estoppel (see Halsbury's Laws of England, Vol 16(2), 2003). Although some authorities have used language to suggest reliance-based estoppels are mere rules of evidence, they are rules of substantive law.

o Estoppel by representation of fact (English law name), equitable estoppel (American law)

o Equitable estoppel (in English law), including

Proprietary estoppel

Promissory estoppel

Estoppel by record—This frequently arises as issue/cause of action estoppel or judicial estoppel where the orders or judgments made in previous legal proceedings prevent the parties from relitigating the same issues or causes of action,

Estoppel by deed (often regarded as technical or formal estoppels)—Where rules of evidence prevent a litigant from denying the truth of what was said or done

Estoppel by silence—Estoppel that prevents a person from asserting something when he had the right and opportunity to do so earlier, and such silence put another person at a disadvantage.

Laches—estoppel in equity by delay. Laches has been considered both a reliance-based estoppel, and a sui generis estoppel.

Reliance-based estoppels

Reliance-based estoppels (at English law) include:

by representation of fact, where one person asserts the truth of a set of facts to another; promissory estoppel, where one person makes a promise to another, but there is no

enforceable contract; and

proprietary estoppel, where the parties are litigating the title to land.

Both Halsbury's and Spencer Bower (see below) describe these three estoppels collectively as estoppels by representation. More simply, one party must say or do something and see the other party rely on what is said or done to change behavior.

All reliance-based estoppels require the victimised party to show both inducement and detrimental reliance, i.e.:

there must be evidence to show that the representor actually intended the victim to act on the representation or promise, or

the victim must satisfy the court that it was reasonable for him or her to act on the relevant representation or promise, and

what the victim did must either have been reasonable, or

the victim did what the representor intended, and

the victim would suffer a loss or detriment if the representor was allowed to deny what was said or done — detriment is measured at the time when the representor proposes to deny the representation or withdraw the promise, not at the time when either was made, and

in all the circumstances, the behavior of the representor is such that it would be "unconscionable" to allow him or her to resile.

Estoppel by representation of fact and promissory estoppel are mutually exclusive: the former is based on a representation of existing fact (or of mixed fact and law), while the latter is based on a promise not to enforce some pre-existing right (i.e. it expresses an intention as to the future). A proprietary estoppel operates only between parties who, at the time of the representation, were in an existing relationship, while this is not a requirement for estoppel by representation of fact.

The test for unconscionability in the English and Australian courts takes many factors into account, including the behavior, state of mind and circumstances of the parties. Generally, the following eight factors are determinative (Michael Spence, Protecting Reliance: The Emergent Doctrine of Equitable Estoppel, Oxford: 1999, pp60–66):

how the promise/representation and reliance upon it were induced; the content of the promise/representation;

the relative knowledge of the parties;

the parties' relative interest in the relevant activities in reliance;

the nature and context of the parties' relationship;

the parties' relative strength of position;

the history of the parties' relationship; and

the steps, if any, taken by the promisor/representor to ensure he has not caused preventable harm.

But in Cobbe v Yeoman's Row [2008] UKHL 55, Lord Scott of Foscote stated the following:

the ingredients for a proprietary estoppel should include, in principle, a proprietary claim made by a

claimant and an answer to that claim based on some fact, or point of mixed fact and law, which the

person against whom the claim was made could be estopped from asserting. To treat a “proprietary

estoppel equity” as requiring simply unconscionable behaviour was a recipe for confusion. The remedy

to which, on the facts as found by the judge, the claimant was entitled could be described neither as

based on an estoppel nor as proprietary in character. His Lordship’s present view was that proprietary

estoppel could not be prayed in aid to render enforceable an agreement declared by statute (s 2 of the

Law Reform (Miscellaneous Provisions) Act 1989) to be void. A claim for the imposition of a constructive

trust to provide a remedy for a disappointed expectation engendered by a representation made in the

course of incomplete contractual negotiations was misconceived and could not be sustained by reliance

on unconscionable behaviour. The claimant was, however, entitled to a quantum meruit payment for his

services in obtaining the planning permission.

Estoppel by representation of fact (English law), equitable estoppel (American law)

In English law, estoppel by representation of fact is a term coined by Spencer Bower. This species of estoppel is also referred to as "common law estoppel by representation" in Halsbury's Laws of England, vol 16(2), 2003 reissue.

In The Law relating to Estoppel by Representation, 4th edition, 2004 at para I.2.2, Spencer Bower defines estoppel by representation of fact as follows:

Where one person (‘the representor’) has made a representation of fact to another person (‘the

representee’) in words or by acts or conduct, or (being under a duty to the representee to speak or act)

by silence or inaction, with the intention (actual or presumptive) and with the result of inducing the

representee on the faith of such representation to alter his position to his detriment, the representor, in

any litigation which may afterwards take place between him and the representee, is estopped, as

against the representee, from making, or attempting to establish by evidence, any averment

substantially at variance with his former representation, if the representee at the proper time, and in

proper manner, objects thereto.

A second definition can be found at Wilken and Villiers, The Law of Waiver, Variation and Estoppel, 2nd ed, Oxford: 2003, at para 9.02:

An estoppel by representation [of fact] will arise between A and B if the following elements are made

out. First, A makes a false representation of fact to B or to a group of which B was a member. [It is not

necessary to demonstrate A knew that the representation was untrue.] Second, in making the

representation, A intended or [in the alternatively,] knew that it was likely to be acted upon. Third, B,

believing the representation, acts to its detriment in reliance on the representation. [It must have been

reasonable to rely on the representation.] Fourth, A subsequently seeks to deny the truth of the

representation. Fifth, no defence to the estoppel can be raised by A.

A representation can be made by words or conduct. Although the representation must be clear and unambiguous, a representation can be inferred from silence where there is a duty to speak or from negligence where a duty of care has arisen. Under English law, estoppel by

representation of fact usually acts as a defence, though it may act in support of a cause of action or counterclaim.

Although there is some debate as to whether "unconscionability" is an element that English courts need to take into account when considering estoppel by representation of fact, the Australian courts clearly do (see Wilken and Villiers, para 9-03; The Commonwealth v Verwayen (1990) 170 CLR 394 at 444 per Deane J.)

American equitable estoppel is the counterpart to estoppel by representation, and its elements are summarized as:

facts misrepresented or concealed knowledge of true facts

fraudulent intent

inducement and reliance

injury to complainant

clear, concise, unequivocal proof of actus (not by implication)

Equitable estoppel (English law)

For the American doctrine of equitable estoppel, see Estoppel by representation of fact.

Under English and Australian legal systems, estoppels in equity include promissory and proprietary estoppels. (Contrast with estoppel by representation, which is a claim (under the English system) at law.) For more information, see Promissory estoppel and Proprietary estoppel below.

The status of estoppel by representation of fact is less clear in Australia. Two seminal decisions purport to fuse common law and equitable estoppels into a single unified doctrine, but the New South Wales Court of Appeal continues to treat estoppel by representation at common law as distinct from equitable estoppel. This can be significant in deciding which court has jurisdiction to adjudicate on the issue.

Proprietary estoppel

In English law, proprietary estoppel is distinct from promissory estoppel. Proprietary Estoppel is not a concept in American law, but a similar result is often reached under the general doctrine of promissory estoppel.

Traditionally, proprietary estoppel arose in relation to rights to use the land of the owner, and possibly in connection with disputed transfers of ownership. Although proprietary estoppel was

only traditionally available in disputes affecting title to real property, it has now gained limited acceptance in other areas of law. Proprietary estoppel is closely related to the doctrine of constructive trust.

J. Fry summarized the five elements for proprietary estoppel as:

the claimant... o ...made a mistake as to his legal rights (typically because the actual owner attempted to

convey the property, but the transfer is invalid or ineffective for some reason);

o ...did some act of reliance;

the defendant...

o ...knows of the existence of a legal right which he (the defendant) possesses, and which is inconsistent with the right claimed by the claimant;

o ...knows of the claimant's mistaken belief; and,

o ...encouraged the claimant in his act of reliance.

Example: A father promised a house to his son who took possession and spent a large sum of money improving the property, but the father never actually transferred the house to the son. Upon the father's death, the son claimed to be the equitable owner. The court found the testamentary trustees (as representatives of the deceased father's estate) were estopped from denying the son's proprietary interest, and ordered them to convey the land to the son.[11]

The decision of the Court of Appeal in "Collier v P & MJ Wright (Holdings)" Ltd 2008 1 WLR 643 suggests that the doctrine of promissory estoppel can now operate to mitigate the harshness of this common law rule. Moreover, Arden LJ held that allowing a creditor to renege on his promise to forebear seeking the balance of a debt in return for part payment would be, in and of itself, inequitable. Therefore, the only reliance that the promisee must demonstrate is the actual making of the part payment. This approach has been criticised as doing violence to the principle set down in Hughes and the extent to which the other members of the Court, namely Longmore LJ, agreed with it is uncertain.

Australian law

The doctrine of promissory estoppel was adopted into Australian law in Legione v. Hateley (1983) 152 CLR 406; however, the plaintiffs were unsuccessful in that case because the reliance was unreasonable and the promise not unequivocal.

In fact, now Australian law has gone beyond the position espoused in the High Trees case; it has been extended successfully to cases where there is no pre-existing legal relationship between the two parties, and promissory estoppel can be wielded as a "sword", not just as a "shield". Mason CJ and Wilson J in Waltons Stores (Interstate) Ltd v. Maher (1988) 164 CLR 387 held that

if estoppel is proven, it gives rise to an equity in favour of the plaintiff, and the court will do the minimum equity that is just in the circumstances. From this case, it is also possible for the promise to come from silence or inaction.

Stated by Brennan J in Waltons Stores: "To establish an equitable estoppel, it is necessary for the plaintiff to prove that 1) the plaintiff assumed that a particular legal relationship would exist between them (and in the latter case) that the defendant would not be free to withdraw from that expected legal relationship; 2) the defendant has induced the plaintiff to adopt that assumption or expectation; 3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; 4) the defendant knew or intended him to do so; 5) the plaintiff's action or inaction will occasion detriment if the assumption of expectation is not fulfilled; and 6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation of otherwise."

As noted above, in Australian law, there is an element of unconscionability, which is satisfied if one party encourages the other party to create assumptions that lead to reliance. Today, the principle of estoppel may give birth to an enforceable obligation even without a consideration under the following conditions: 1. promise 2. dishonest behavior of the promittant 3. special relationship between the promittant and the beneficior (e.g.: duty of information) 4. irreversible changement of the situation of the beneficior of the promise

American law

In the many jurisdictions of the United States, promissory estoppel is generally an alternative to consideration as a basis for enforcing a promise. It is also sometimes referred to as detrimental reliance.

The American Law Institute in 1932 included the principle of estoppel into § 90 of the Restatement of Contracts, stating:

A promise which the promisor should reasonably expect to induce action or forbearance of a definite

and substantial character on the part of the promisee and which does induce such action or forbearance

is binding if injustice can be avoided only by enforcement of the promise.

—Restatement (Second) removed the requirement that the detriment be "substantial".

The distinction between promissory estoppel and equitable estoppel should be noted:

Equitable estoppel is distinct from promissory estoppel. Promissory estoppel involves a clear and

definite promise, while equitable estoppel involves only representations and inducements. The

representations at issue in promissory estoppel go to future intent, while equitable estoppel involves

statement of past or present fact. It is also said that equitable estoppel lies in tort, while promissory

estoppel lies in contract. The major distinction between equitable estoppel and promissory estoppel is

that the former is available only as a defense, while promissory estoppel can be used as the basis of a

cause of action for damages.

Suppose that B goes to a store and sees a sign that the price of a radio is $10. B tells the shopkeeper that he will get the money and come back later that day to purchase it; there is no discussion of price. The shopkeeper says that when B returns, he will be happy to deal with B as he deals with all his customers but that, if he sells all the radios (he has three), he will not be able to help B. Hearing this, B goes and sells his watch for $10 (it was really worth $15, but since B wanted the money right away, he chose not to wait for the best price). When B returns, the sign says $11, and the owner tells B that he has raised the price. In Equity, can you argue that the shopkeeper is estopped by conduct? B relied upon the implied representation that a radio would be sold for $10 when he returned with the money; B has sold his watch at a price lower than the market price, and thus he has acted to his detriment. (Note that if B's watch was worth $10, and he received a fair price, there would be no detriment.) But the problem is that the shopkeeper did not guarantee to hold one of the radios against the possibility of B's return nor did they agree a fixed price. The shopkeeper's conscience might have been affected if he had known that B was going home to collect the money and would definitely return to buy one of the three radios. Indeed, in some common law jurisdictions, a promise by the shopkeeper to hold a specific radio would create a binding contract, even if B had to go for the money. A promise to pay the owner in the future is good consideration if it is made in exchange for a promise to sell a specific radio (one from three is probably sufficiently specific): one promise in exchange for a second promise creates equal value. So the shopkeeper's actual words and knowledge are critical to deciding whether either a contract or an estoppel arises.

For an example of promissory estoppel in the construction industry, suppose that B Ltd consolidates estimates from a number of subcontractors and quotes a single price on a competitive tender. The client accepts B Ltd's quote and construction begins. But one of the subcontractors then claims reimbursement above its original estimate and, because of this change, B Ltd cannot profit from the works. If both parties knew that the accuracy of the individual estimates was critical to the success of the tender and the profitability of the contract as a whole, a court might apply promissory estoppel and allow B Ltd to pay only what the subcontractor originally estimated rather than the new, higher price. But, if both parties hoped that there would be an opportunity to increase the contract prices to reflect additional expenditure, the subcontractor's conscience would not be as limited in seeking a higher payment and B Ltd might be penalised for not building an adequate contingency sum into the tendered price.

One contentious point during the drafting of the Restatement was how to calculate the amount of damages flowing from a promissory estoppel. During the deliberations, the following example was considered: a young man's uncle promises to give him $1,000 to buy a car. The young man buys a car for $500, but the uncle refuses to pay any money. One view was that the young man should be entitled to $1,000 (the amount promised), but many believed that the

young man should only be entitled to $500 (the amount he actually lost). The language eventually adopted for the Second Restatement reads: "The remedy granted for breach may be limited as justice requires." — a formula which leaves quantification to the discretion of the court.

Other estoppels

Pais

Estoppel in pais (literally “by act of notoriety", or "solemn formal act”) is the historical root of common law estoppel by representation and equitable estoppel. The terms Estoppel in pais and equitable estoppel are used interchangeably in American law.

Convention

Estoppel by convention in English law (also known as estoppel by agreement) occurs where two parties negotiate or operate a contract but make a mistake. If they share an assumption, belief or understanding of how the contract will be interpreted or what the legal effect will be, they are bound by that belief, assumption or understanding if:

(i) they both knew the other had the same belief, and (ii) they both based their subsequent dealings on those beliefs.

Some say that estoppel by convention is not truly an estoppel in its own right, but merely an instance of reliance-based estoppel (estoppel by representation would be its most frequent form). Others see it as no more than an application of the rule of interpretation that, where words in a contract are ambiguous, one always interprets those words so as to give effect to the actual intentions of the parties even though that would not be the usual legal outcome.

Estoppel by convention is most commonly invoked if one party wishes to rely on pre-contract negotiation as an aid to construction of the contract, Chartbrook Ltd and another v Persimmon Homes Ltd and another [2009] UKHL 38.

Acquiescence

Estoppel by acquiescence may arise when one person gives a legal warning to another based on some clearly asserted facts or legal principle, and the other does not respond within "a reasonable period of time". By acquiescing, the other person is generally considered to have lost the legal right to assert the contrary.

As an example, suppose that Jill has been storing her car on Jack's land with no contract between them. Jack sends a registered letter to Jill's legal address, stating: "I am no longer willing to allow your car to stay here for free. Please come get your car, or make arrangements to pay me rent for storing it. If you do not do so, within 30 days, I will consider the car

abandoned and will claim ownership of it. If you need more time to make arrangements, please contact me within 30 days, and we can work something out." If Jill does not respond, she may be said to have relinquished her ownership of the car, and estoppel by acquiescence may prevent any court from invalidating Jack's actions of registering the car in his name and using it as his own.

Deed

Estoppel by deed is a rule of evidence arising from the status of a contract signed under seal — such agreements, called deeds, are more strictly enforced than ordinary contracts and the parties are expected to take greater care to verify the contents before signing them. Hence, once signed, all statements of fact (usually found in the opening recital which sets out the reason(s) for making the deed) are conclusive evidence against the parties who are estopped from asserting otherwise.

Issue estoppel

Issue estoppel (more commonly known as issue preclusion) prevents, in some cases, an issue that has already been litigated and decided on the merits from being re-litigated, even when the parties are different. In the world of crime, some cases have achieved notoriety, e.g. in the Birmingham Six saga, the House of Lords ruled in Hunter v. Chief Constable of the West Midlands Police (1982) that issue estoppel applied. Lord Diplock said:

The inherent power which any court of justice must possess to prevent misuse of its procedure in a way

which, although not inconsistent with the literal application of its procedural rules, would nevertheless

be manifestly unfair to a party to litigation before it, or would otherwise bring the administration of

justice into disrepute among right-thinking people.

Intention to be legally bound

There is a presumption for commercial agreements that parties intend to be legally bound (unless the parties expressly state that they do not want to be bound, like in heads of agreement). On the other hand, many kinds of domestic and social agreements are unenforceable on the basis of public policy, for instance between children and parents. One early example is found in Balfour v. Balfour.Using contract-like terms, Mr. Balfour had agreed to give his wife £30 a month as maintenance while he was living in Ceylon (Sri Lanka). Once he left, they separated and Mr. Balfour stopped payments. Mrs. Balfour brought an action to enforce the payments. At the Court of Appeal, the Court held that there was no enforceable agreement

as there was not enough evidence to suggest that they were intending to be legally bound by the promise.

The case is often cited in conjunction with Merritt v. Merritt.[34] Here the court distinguished the case from Balfour v. Balfour because Mr. and Mrs. Merritt, although married again, were estranged at the time the agreement was made. Therefore any agreement between them was made with the intention to create legal relations.

Intention to be legally boundIntention to be legally bound is a technical term used in contract law, particularly English contract law, to denote a court's presumption that parties to an agreement wished it to be enforceable by a court. The doctrine does not in fact look to a party's subjective intentions at all, but reflects a court's general policy to uphold agreements in the commercial sphere of life, and not to interfere within the private sphere.

Classical usage

The concept is closely related to the "will theory" of contracts as espoused by German jurist Friedrich Carl von Savigny in his nineteenth century work System des heutigen Römischen Rechts (1840). It had been a prominent concept through the nineteenth century that contracts were based on a meeting of minds between two or more parties, and that their mutual consent to a bargain, or their intention to contract, were paramount.

Household Fire and Carriage Accident Insurance Co Ltd v Grant (1879) 4 Ex D 216 Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256

Modern meaning

While it is generally true that courts wish to uphold the parties intentions, courts moved in the later half of the nineteenth century to a more objective stance for interpretatio whereby the emphasis moved to the way in which the parties had manifested their consent to a bargain to the outside world. Given this change, it was still said that "intention to be legally bound" was a necessary element for a contract, but it came to reflect a policy about when to enforce agreements, and when not to. In two decisions, Lord Atkin showed that a rebuttable presumption exists that one does not "intend" (ie the court deems the parties) to create a legally enforceable contract in the domestic sphere, but one does in the commercial sphere of life. In Balfour v Balfour a husband promised his wife to pay maintenance while he worked in Ceylon. It was held that between the two there was no "intention to be legally bound". By contrast, in Rose & Frank Co v JR Crompton & Bros Ltd it was held that two business parties did not intend to contract, but only because they had overcome the very strong presumption that commercial agreements are enforceable through the used of expressly worded "honour

clause". The parties had expressly stated they did not wish the agreement to be reviewed or enforced by a court.

Third parties

The doctrine of privity of contract means that only those involved in striking a bargain would have standing to enforce it. In general this is still the case, only parties to a contract may sue for the breach of a contract, although in recent years the rule of privity has eroded somewhat and third party beneficiaries have been allowed to recover damages for breaches of contracts they were not party to. In cases where facts involve third party beneficiaries or debtors to the original contracting party have been allowed to be considered parties for purposes of enforcement of the contract .A recent advance has been seen in the case law as well as statutory recognition to the dilution of the doctrine of privity of contract .The recent tests applied by courts have been the test of benefit and the duty owed test .The duty owed test looks to see if the third party was agreeing to pay a debt for the original party[needs elaboration] and whereas the benefit test looks to see if circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. Any defense allowed to parties of the original contract extend to third party beneficiaries.[74] A recent example is in England, where the Contract (Rights of Third Parties) Act 1999 Contracts (Rights of Third Parties) Act 1999 was introduced.

Party (disambiguation)A party is a public or private social gathering.

Party may also refer to:

Party (law), a person or group of persons composing a single entity for the purposes of the law Party (politics), an organization that seeks to attain political power within a government

Party (role playing games), a group of game characters working together for a common purpose, generally comprising the player characters

Wedding party, the bride, groom, bridesmaids, groomsmen and sometimes other participants in a wedding

Formalities and writing

A verbal exchange of promises may be binding and be as legally valid as a written contract.

An unwritten, unspoken contract, also known as "a contract implied by the acts of the parties", which can be either implied in fact or implied in law, may also be legally binding.

Most jurisdictions have rules of law or statutes which may render otherwise valid oral contracts unenforceable. This is especially true regarding oral contracts involving large amounts of money or real estate. For example, in the U.S., generally speaking, a contract is unenforceable if it violates the common law statute of frauds or equivalent state statutes which require certain contracts to be in writing. An example of the above is an oral contract for the sale of a motorcycle for US$5,000 in a jurisdiction which requires a contract for the sale of goods over US $500 to be in writing to be enforceable. The point of the Statute of frauds is to prevent false allegations of the existence of contracts that were never made, by requiring formal (i.e. written) evidence of the contract. However, a common remark is that more frauds have been committed through the application of the Statute of frauds than have ever been prevented. Contracts that do not meet the requirements of common law or statutory Statutes of frauds are unenforceable, but are not necessarily thereby void. However, a party unjustly enriched by an unenforceable contract may be required to provide restitution for unjust enrichment. Statutes of frauds are typically codified in state statutes covering specific types of contracts, such as contracts for the sale of real estate.

In Australia and many, if not all, jurisdictions which have adopted the common law of England, for contracts subject to legislation equivalent to the Statute of frauds, there is no requirement for the entire contract to be in writing. Although for property transactions there must be a note or memorandum evidencing the contract, which may come into existence after the contract has been formed. The note or memorandum must be signed in some way, and a series of documents may be used in place of a single note or memorandum. It must contain all material terms of the contract, the subject matter and the parties to the contract. In England and Wales, the common law Statute of frauds is only now in force for guarantees, which must be evidenced in writing, although the agreement may be made orally. Certain other kinds of contract must be in writing or they are void, for instance, for sale of land under s. 52, Law of Property Act 1925.

If a contract is in a written form, and somebody signs the contract, then the person is bound by its terms regardless of whether they have read it or not, provided the document is contractual in nature. Furthermore, if a party wishes to use a document as the basis of a contract, reasonable notice of its terms must be given to the other party prior to their entry into the contract.This includes such things as tickets issued at parking stations.

Statute of frauds

The statute of frauds refers to the requirement that certain kinds of contracts be memorialized in a signed writing.

Traditionally, the statute of frauds requires a signed writing in the following circumstances:

Contracts in consideration of marriage. Contracts which cannot be performed within one year.

Contracts for the transfer of an interest in land.

Contracts by the executor of a will to pay a debt of the estate with his own money.

Contracts for the sale of goods above a certain value.

Contracts in which one party becomes a surety (acts as guarantor) for another party's debt or other obligation.

This can be remembered by the mnemonic "MY LEGS": Marriage, one year, land, executor, goods, surety; or Marriage, one year, land, executor, guarantor, sale.

Terminology

The term statute of frauds comes from an English Act of Parliament (29 Chas. 2 c. 3) passed in 1677 (authored by Sir Leoline Jenkins and passed by the Cavalier Parliament), and more properly called An Act for Prevention of Frauds and Perjuries. Many common law jurisdictions have made similar statutory provisions, while a number of civil law jurisdictions have equivalent legislation incorporated into their civil codes. The original English statute itself may still be in effect in a number of US states or Canadian provinces, depending on the constitutional or reception statute of English law, and any subsequent legislative developments.

Raising the defense

A defendant in a "MYLEGS" case who wishes to use the Statute as a defense must raise the Statute in a timely manner. The burden of proving that a written contract exists only comes into play when a Statute of Frauds defense is raised by the defendant. A defendant who admits the existence of the contract in his pleadings, under oath in a deposition or affidavit, or at trial, may not use the defense.

A statute of frauds defense may also be effected by a showing of part performance, upon showing of one of two different conditions. If the parties have taken action in reliance on the

agreement, as in the case Riley v. Capital Airlines, Inc. the court held that part performance does not take an executory portion of contract out of the Statute of Frauds. Each performance constitutes a contract that falls outside the Statute of Frauds and was enforceable to the extent it is executed. But the unexecuted portion of the contract falls within the Statute of Frauds and is unenforceable. As a result, only the executed portion of the contract can be recovered, and the doctrine of part performance does not remove the contract from the statute. On the other hand, the court in Schwedes v. Romain held that partial performance and grounds for estoppel can make the contract effective.

In an action for specific performance, an agreement to convey land must satisfy the Statute of Frauds. The Statute is satisfied if the contract to convey is evidenced by a writing or writings containing the essential terms of a purchase and sale agreement and signed by the party against whom the contract is to be enforced. If there is no written agreement, a court of equity can specifically enforce an oral agreement to convey only if the part performance doctrine is satisfied. In a majority of jurisdictions, part performance is proven when the purchaser pays the purchase price, has possession of the land, and makes improvements on the land, all with the permission of the seller. No jurisdiction is satisfied by payment of the purchase price alone.

Under common law, the Statute of Frauds also applies to contract modification - for example, suppose party A makes an oral agreement to lease a car from party B for 9 months. Immediately after taking possession party A decides that he really likes the car, and makes an oral offer to party B to extend the term of the lease by 6 months. Although neither agreement alone comes under the Statute of Frauds, the extension modifies the original contract to make it a 15-month lease, thereby bringing it under the Statute. In practice, this works in reverse as well - an agreement to reduce the lease from 15 months to 9 months would not require a writing. However, almost all jurisdictions have enacted statutes that require a writing in such situations. The Uniform Commercial Code abrogated this requirement for contract modification, discussed below.

Uniform Commercial Code

In the United States, contracts for the sale of goods where the price equals $500.00 or more (with the exception of professional merchants performing their normal business transactions, or any custom-made items designed for one specific buyer) fall under the statute of frauds under the Uniform Commercial Code (article 2, section 201). The most recent revision of UCC § 2-201 increases the triggering point for the UCC Statute of Frauds to $5,000, but as of 2006 no U.S. state has adopted revised Section 201.

The application of the statute of frauds to dealings between merchants has been modified by provisions of the Uniform Commercial Code, which is a statute that has been enacted at least in part by every state (Louisiana has enacted all of the UCC except for Article 2, as it prefers to maintain its civil law tradition governing the sale of goods). Uniform Commercial Code § 1-206 sets out a "catch-all" statute of frauds for personal property not covered by any other specific

law, stating that a contract for the sale of such property where the purchase price exceeds $500.00 is not enforceable unless memorialized by a signed writing. This section, however, is rarely invoked in litigation.

Interestingly, with respect to securities transactions, the Uniform Commercial Code (section 8-113) has abrogated the statute of frauds. The drafters of the most recent revision commented that "with the increasing use of electronic means of communication, the statute of frauds is unsuited to the realities of the securities business."

England and Wales

The Statute of Frauds 1677 was largely repealed in England and Wales in 1954, with the exception of the requirement as it relates to surety for another's debt.

Exceptions

An agreement may be enforced even if it does not comply with the statute of frauds in the following situations:

Merchant Confirmation Rule, under the UCC. If one merchant sends a writing sufficient to satisfy the statute of frauds to another merchant and the receiving merchant has reason to know of the contents of the sent confirmation and does not object to the confirmation within 10 days, the confirmation is good to satisfy the statute as to both parties.

Admission of the existence of a contract by the defendant under oath,

Part Performance of the contract. The agreement is enforceable up to the amount already paid, delivered, etc.

The goods were specially manufactured for the buyer and the seller either 1) began manufacturing them, or 2) entered into a third party contract for their manufacture, and the manufacturer cannot without undue burden sell the goods to another person in the seller's ordinary course of business-- for example, t-shirts with a baseball team logo or wall-to-wall carpeting for an odd-sized room.

Promissory Estoppel can be applied when the charging party detrimentally relies on the otherwise unenforceable contract.

Bilateral and unilateral contracts

Unilateral contract of adhesion on timekeeping ticket dispensed by vending machine at parking lot entrance

Contracts may be bilateral or unilateral. A bilateral contract is the kind of contract that most people think of when they think "contract." It is an agreement in which each of the parties to the contract makes a promise or promises to the other party. For example, in a contract for the sale of a home, the buyer promises to pay the seller $200,000 in exchange for the seller's promise to deliver title to the property.

In a unilateral contract, only one party to the contract makes a promise. A typical example is the reward contract: A promises to pay a reward to B if B finds A's dog. B is not obliged to find A's dog, but A is obliged to pay the reward to B if B finds the dog. The consideration for the contract here is B's reliance on A's promise, or B giving up his legal right to do whatever he wanted at the time he was engaged in the finding of the dog.

In this example, the finding of the dog is a condition precedent to A's obligation to pay, although it is not a legal condition precedent, because technically no contract here has arisen until the dog is found (because B has not accepted A's offer until he finds the dog, and a contract requires offer, acceptance, and consideration), and the term "condition precedent" is used in contract law to designate a condition of a promise in a contract. For example, if B promised to find A's dog, and A promised to pay B when the dog was found, A's promise would have a condition attached to it, and offer and acceptance would already have occurred. This is a situation in which a condition precedent is attached to a bilateral contract.

Condition precedents can also be attached to unilateral contracts, however. This would require A to require a further condition to be met before he pays B for finding his dog. So, for example, A could say "If anyone finds my dog, and the sky falls down, I will give that person $100." In this situation, even if the dog is found by B, he would not be entitled to the $100 until the sky falls down. Therefore the sky falling down is a condition precedent to A's duty being actualized, even though they are already in a contract, since A has made an offer and B has accepted.

An offer of a unilateral contract may often be made to many people (or 'to the world') by means of an advertisement. In that situation, acceptance will only occur on satisfaction of the condition (such as the finding of the offeror's dog). If the condition is something that only one party can perform, both the offeror and offeree are protected – the offeror is protected because he will only ever be contractually obliged to one of the many offerees; and the offeree is protected, because if she does perform the condition, the offeror will be contractually obliged to pay her.

In unilateral contracts, the requirement that acceptance be communicated to the offeror is waived. The offeree accepts by performing the condition, and the offeree's performance is also treated as the price, or consideration, for the offeror's promise. The offeror is master of the offer; it is he who decides whether the contract will be unilateral or bilateral. In unilateral contracts, the offer is made to the public at large.

A bilateral contract is one in which there are duties on both sides, rights on both sides, and consideration on both sides. If an offeror makes an offer such as "If you promise to paint my house, I will give you $100," this is a bilateral contract once the offeree accepts. Each side has promised to do something, and each side will get something in return for what they have done.

Uncertainty, incompleteness and severance

If the terms of the contract are uncertain or incomplete, the parties cannot have reached an agreement in the eyes of the law. An agreement to agree does not constitute a contract, and an inability to agree on key issues, which may include such things as price or safety, may cause the entire contract to fail. However, a court will attempt to give effect to commercial contracts where possible, by construing a reasonable construction of the contract.

Courts may also look to external standards, which are either mentioned explicitly in the contract or implied by common practice in a certain field. In addition, the court may also imply a term; if price is excluded, the court may imply a reasonable price, with the exception of land, and second-hand goods, which are unique.

If there are uncertain or incomplete clauses in the contract, and all options in resolving its true meaning have failed, it may be possible to sever and void just those affected clauses if the contract includes a severability clause. The test of whether a clause is severable is an objective test—whether a reasonable person would see the contract standing even without the clauses.

Contractual terms

A contractual term is "[a]ny provision forming part of a contract".[44] Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal weight as they are peripheral to the objectives of the contract.

A contractual term is "Any provision forming part of a contract" Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the contract.

Classification of term

Condition or Warranty. Conditions are terms that go to the very root of a contract. Breach of these terms repudiates the contract, allowing the other party to discharge the contract. A warranty is less imperative than a condition, so the contract will survive a breach. Breach of either a condition or a warranty will give rise to damages.

It is an objective matter of fact whether a term goes to the root of a contract. By way of illustration, an actress's obligation to perform the opening night of a theatrical production is a condition, whereas a singer's obligation to perform during the first three days of rehearsal is a warranty.

Statute may also declare a term or nature of term to be a condition or warranty. For example, the Sale of Goods Act 1979 s15A provides that terms as to title, description, quality, and sample (as described in the Act) are conditions save in certain defined circumstances.

Innominate term. Lord Diplock, in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd[6], created the concept of an innominate term, breach of which may or not go to the root of the contract depending upon the nature of the breach. Breach of these terms, as with all terms, will give rise to damages. Whether or not it repudiates the contract depends upon whether legal benefit of the contract has been removed from the innocent party. Megaw LJ, in 1970, preferred the use of the classic categorising into condition or warranty due to legal certainty. This was interpreted by the House of Lords as merely restricting its application in Reardon Smith Line Ltd. v Hansen-Tangen.

Status as a term

Status as a term is important as a party can only take legal action for the non fulfillment of a term as opposed to representations or mere puffs. Legally speaking, only statements that amount to a term create contractual obligations. Statements can be split into the following types:

Puff (sales talk): If no reasonable person hearing this statement would take it seriously, it is a puff, and no action in contract is available if the statement proves to be wrong. It may also be referred to as "puffery". This is common in television commercials.

Representation: A representation is a statement of fact which does not amount to a term of the contract but it is one that the maker of the statement does not guarantee its truth. This gives rise to no contractual obligation but may amount to a tort, for example misrepresentation.

Term: A term is similar to a representation, but the truth of the statement is guaranteed by the person who made the statement therefore giving rise to a contractual obligation. For the purposes of Breach of Contract a term may further be categorized as a condition, warranty or innominate term.

There are various factor that a court may take into account in determining the nature of a statement. These include:

Timing: If the contract was concluded soon after the statement was made, this is a strong indication that the statement induced the person to enter into the contract. Lapse of a week within the negotiations of a car sale was held to amount only to a representation in Routledge v McKay

Content of statement: It is necessary to consider what was said in the given context, which has nothing to do with the importance of a statement.

Knowledge and expertise: In Oscar Chess Ltd v. Williams, a person selling a car to a second-hand car dealer stated that it was a 1948 Morris, when in fact it was a 1939 model car. It was held that the statement did not become a term because a reasonable person in the position of the car dealer would not have thought that an inexperienced person would have guaranteed the truth of the statement.

Reduction into Writing: Where the contract is consolidated into writing, previous spoken terms, omitted from the consolidation, will probably be relegated to representations. The old case of Birch v Paramount Estates Ltd.[ provided that a very important spoken term may persist even if omitted from the written consolidation; this case concerned the quality of a residential house.

The parol evidence rule limits what things can be taken into account when trying to interpret a contract. This rule has practically ceased operation under UK law, but remains functional in Australian Law.

Implied terms

A Term may either be expressed or implied. An Express term is stated by the parties during negotiation or written in a contractual document. Implied terms are not stated but nevertheless form a provision of the contract.

Terms implied in fact

The Privy Council established a five stage test in BP Refinery Western Port v. Shire of Hastings:

1. Reasonableness and equitableness: The implied term must be reasonable and equitable.2. Business efficacy: The implied term must be necessary for the business efficacy of the contract.

For instance, if the term simply causes the contract to operate better, that does not fit this criterion. This is the principle laid out in The Moorcock. The presiding judge created a quaint concept of an officious bystander; if the officious bystander were to propose a term and both the parties would be likely to reply with a testy "oh, of course", the term is implied.

3. Obviousness: The term is so obvious that it goes without saying. Furthermore, there must be one and only one thing that would be implied by the parties. For example, in Codelfa Construction Pty Ltd v. State Rail Authority of New South Wales, a term regarding the inability of construction company to work three shifts a day could not be implied because it was unclear what form it would have taken. In English Law, This principle was established in the case of Spring v. NASDS, in the context of a Trade Union membership contract.

4. Clear expression: The term must be capable of clear expression. No specific technical knowledge should be required.

5. Consistency: The implied term may not contradict an express term.

In Australia, the High Court has ruled that the test in BP Refinery applies only to formal contracts, while the test in Byrne and Frew v. Australian Airlines Ltd shall apply to informal contracts:

Necessity: The term must be necessary to ensure reasonable or effective operation of a contract of the nature before the court.

Consistency: The implied term may not contradict an express term (same as for formal contracts).

Clear expression: The term must be capable of clear expression (same as for formal contracts).

Obvious: McHugh and Gummow JJ have stated that it must also be obvious.

Terms implied in law

These are terms that have been implied into standardised relationships.

Common law.

Liverpool City Council v. Irwin established a term to be implied into all contracts between tenant and landlord that the landlord is obliged to keep the common areas in a reasonable state of repair.

Wong Mee Wan v Kwan Kin Travel Services Ltd. established that when a tour operator contracts to for the sale of goods. The most important legislation under United Kingdom law is the Sale of Goods Act 1979, the Consumer Protection (Distance Selling) Regulations 2000 and the Supply of Goods and Services Act 1982 which imply terms into all contracts whereby goods are sold or services provided.

These terms will be implied into all contracts of the same nature as a matter of law.

Statutory.

The rules by which many contracts are governed are provided in specialized statutes that deal with particular subjects. Most countries, for example, have statutes which deal directly with sale of goods, lease transactions, and trade practices. For example, each American state except

Louisiana has adopted Article 2 of the Uniform Commercial Code, which regulates contracts for the sale of goods. The most important legislation implying terms under United Kingdom law are the Sale of Goods Act 1979, the Consumer Protection (Distance Selling) Regulations 2000 and the Supply of Goods and Services Act 1982 which imply terms into all contracts whereby goods are sold or services provided.

Terms implied by custom or trade

One is generally bound by the custom of the industry that one is in. To imply a term due to custom or trade, one must prove the existence of the custom, which must be notorious, certain, legal and reasonable

Course of dealing

If two parties have regularly conduct business on certain terms, the terms may be assumed to be same for each contract made, if not expressly agreed to the contrary. The parties must have dealt on numerous occasions and been aware of the term purported to be implied. In Hollier v Rambler Motors Ltd. four occasions over five years was held to be sufficient. In British Crane Hire Corp. Ltd. v Ipswitch Plant Hire Ltd. written terms were held to have been implied into an oral in which there was no mention of written terms.

Good faith

It is common for lengthy negotiations to be written into a heads of agreement document that includes a clause to the effect that the rest of the agreement is to be negotiated. Although these cases may appear to fall into the category of agreement to agree, Australian courts will imply an obligation to negotiate in good faith provided that certain conditions are satisfied

Negotiations were well-advanced and the large proportion of terms have been worked out; and There exists some mechanism to resolve disputes if the negotiations broke down.

The test of whether one has acted in good faith is a subjective one; the cases suggest honesty, and possibly also reasonableness. There is no such implied term under UK common law: an attempt was made by Lord Denning in a series of case during the 70s and 80s but they are no longer considered 'good law'. European legislation imposes this duty, but only in certain circumstances.

The Unfair Terms in Consumer Contracts Regulations 1999 reg 8 renders ineffective any 'unfair' contractual term if made between a seller or supplier and a consumer.Regulation 5 of the statutory instrument further elaborates upon the concept of 'unfair', which is rather novel to English law. 'Unfair' is a term that was not individually negotiated (i.e. standard form) that "causes a significant imbalance in the parties' rights and obligations arising under the contract to the detriment of the consumer". This is not possible if the term is not contrary to 'good faith'; such as in Director General of Fair Trading v First National Bank, wherein the lack of a

seemingly unfair interest term would leave the bank open to a very poor deal whereby no interest could be charged.

"Subject to" contracts

If a contract specifies "subject to contract", it may fall into one of three categories:

1. The parties are immediately bound to the bargain, but they intend to restate the deal in a formalised contract that will not have a different effect; or

2. The parties have completely agreed to the terms, but have made the execution of some terms in the contract conditional on the creation of a formalised contract; or

3. It is merely an agreement to agree, and the deal will not be concluded until the formalised contract has been drawn up.

If a contract specifies "subject to finance", it imposes obligations on the purchaser:

The purchaser must seek finance; and When offers of finance arrive, the purchaser must make a decision as to whether the offers of

finance are suitable.

This may also refer to contingent conditions, which come under two categories: condition precedent and condition subsequent. Conditions precedent are conditions that have to be complied with before performance of a contract With conditions subsequent, parties have to perform until the condition is not met. Failure of a condition repudiates the contract this is not to necessarily discharge it. Repudiation will always gives rise to an action for damages.

Boilerplate

As discussed in Tina L. Stark's Negotiating and Drafting Contract Boilerplate, when lawyers refer to a “boilerplate” provision, they are referring to any standardized, “one size fits all” contract provision. But lawyers also use the term in a more narrow context to refer to certain provisions that appear at the end of the contract. Typically, these provisions tell the parties how to govern their relationship and administer the contract. Although often thought to be of secondary importance, these provisions have significant business and legal consequencesCommon provisions include the governing law provision, venue, assignment and delegation provisions, waiver of jury trial provisions, notice provisions, and force majeure provisions.

Classification of term

Condition or Warranty. Conditions are terms which go to the very root of a contract. Breach of these terms repudiates the contract, allowing the other party to discharge the contract. A warranty is not so imperative so the contract will subsist after a warranty breach. Breach of either will give rise to damages.

It is an objective matter of fact whether a term goes to the root of a contract. By way of illustration, an actress' obligation to perform the opening night of a theatrical production is a condition, whereas a singers obligation to perform during the first three days of rehearsal is a warranty.

Statute may also declare a term or nature of term to be a condition or warranty; for example the Sale of Goods Act 1979 s15A provides that terms as to title, description, quality and sample (as described in the Act) are conditions save in certain defined circumstances.

Innominate term. Lord Diplock, in Hong Kong Fir Shipping Co Ltd v. Kawasaki Kisen Kaisha Ltd, created the concept of an innominate term, breach of which may or not go to the root of the contract depending upon the nature of the breach. Breach of these terms, as with all terms, will give rise to damages. Whether or not it repudiates the contract depends upon whether legal benefit of the contract has been removed from the innocent party. Megaw LJ, in 1970, preferred the legal certainty of using the classic categories of condition or warranty. This was interpreted by the House of Lords as merely restricting its application in Reardon Smith Line Ltd. v Hansen-Tangen.

Status as a term

Template:Status (law) as a term is important as a party can only take legal action for the non fulfillment of a term as opposed to representations or mere puffery. Legally speaking, only statements that amount to a term create contractual obligations. There are various factor that a court may take into account in determining the nature of a statement. In particular, the importance apparently placed on the statement by the parties at the time the contract is made is likely to be significant. In Bannerman v. White it was held a term of a contract for sale and purchase of hops that they had not been treated with sulphur, since the buyer made very explicit his unwillingness to accept hops so treated, saying that he had no use for them. The relative knowledge of the parties may also be a factor, as in Bissett v. Wilkinson in which a statement that farmland being sold would carry 2000 sheep if worked by one team was held merely a representation (it was also only an opinion and therefore not actionable as misrepresentation). The reason this was not a term was that the seller had no basis for making the statement, as the buyer knew, and the buyer was prepared to rely on his own and his son's knowledge of farming.

Implied terms

A term may either be express or implied. An express term is stated by the parties during negotiation or written in a contractual document. Implied terms are not stated but nevertheless form a provision of the contract.

Terms implied in fact

Terms may be implied due to the facts of the proceedings by which the contract was formed. In the Australian case of BP Refinery Westernport v. Shire of Hastings [56] the UK Privy Council proposed a five stage test to determine situations where the facts of a case may imply terms (this only applies to formal contracts in Australia). However, the English Court of Appeal sounded a note of caution with regard to the BP case in Philips Electronique Grand Public SA v. British Sky Broadcasting Ltd in which the Master of the Rolls described the test as "almost misleading" in its simplicity. The classic tests have been the "business efficacy test" and the "officious bystander test". The first of these was proposed by Lord Justice Bowen in The Moorcock. This test requires that a term can only be implied if it is necessary to give business efficacy to the contract to avoid such a failure of consideration that the parties cannot as reasonable businessmen have intended. But only the most limited term should then be implied - the bare minimum to achieve this goal. The officious bystander test derives its name from the judgment of Lord Justice Mackinnon in Shirlaw v. Southern Foundries (1926) Ltd but the test actually originates in the judgment of Lord Justice Scrutton in Reigate v. Union Manufacturing Co (Ramsbottom) Ltd This test is that a term can only be implied in fact if it is such a term that had an "officious bystander" listening to the contract negotiations suggested that they should include this term the parties would "dismiss him with a common 'Oh of course!'". It is at least questionable whether this is truly a separate test or just a description of how one might go about arriving at a decision on the basis of the business efficacy test.

Some jurisdictions, notably Australia, Israel and India, imply a term of good faith into contracts. A final way in which terms may be implied due to fact is through a previous course of dealing or common trade practice. The Uniform Commercial Code of the United States also imposes a duty of good faith in performance and enforcement of contracts covered by the Code, which cannot be derogated from.

Terms implied in law

These are terms that have been implied into standardized relationships. Instances of this are quite numerous, especially in employment contracts and shipping contracts.

Common law

Liverpool City Council v. Irwin established a term to be implied into all contracts between tenant and landlord in multi-storey blocks that the landlord is obliged to take reasonable care to keep the common areas in a reasonable state of repair.

Wong Mee Wan v Kwan Kin Travel Services Ltd. established that when a tour operator contracts to for the sale of goods.

These terms will be implied into all contracts of the same nature as a matter of law.

Statute law

The rules by which many contracts are governed are provided in specialized statutes that deal with particular subjects. Most countries, for example, have statutes which deal directly with sale of goods, lease transactions, and trade practices. For example, most American states have adopted Article 2 of the Uniform Commercial Code, which regulates contracts for the sale of goods. The most important legislation implying terms under United Kingdom law are the Sale of Goods Act 1979, the Consumer Protection (Distance Selling) Regulations 2000 and the Supply of Goods and Services Act 1982 which imply terms into all contracts whereby goods are sold or services provided.

Coercive vs voluntary contractive exchanges

There are a few ways of determining whether a contract has been coerced or is voluntary:

Moral consideration: Objective consideration of right or wrong outside of the objective cause, or the perceived cause. Example: X (event) occurs everyday at 5 pm. X is wrong. Anything that avoids X is good; allowing X, even if all parties agree, is bad.

Phenomenological consideration - what models did the participants have which influenced the perception of what was to occur or what had occurred. Example: I observe X, Y (events) every day at 5 pm. I contract against X. Today I did / did not see Y occur.

Statistical consideration - did the participants have a statistical prediction, likelihood of an event occurring which is covered by the contract. Example: X (event) happens every day at 5 pm, I enter a contract to avoid X. X does or does not occur.

Setting aside the contract

There can be four different ways in which contracts can be set aside. A contract may be deemed 'void', 'voidable', 'unenforceable'or 'ineffective'. Voidness implies that a contract never came into existence. Voidability implies that one or both parties may declare a contract ineffective at their wish. Unenforceability implies that neither party may have recourse to a court for a remedy. Ineffectiveness implies that the contract terminates by order of a court where a public body has failed to satisfy public procurement law. To rescind is to set aside or unmake a contract.

Misrepresentation

Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.

There are two types of misrepresentation in contract law, fraud in the factum and fraud in inducement. Fraud in the factum focuses on whether the party in question knew they were creating a contract. If the party did not know that they were entering into a contract, there is no meeting of the minds, and the contract is void. Fraud in inducement focuses on misrepresentation attempting to get the party to enter into the contract. Misrepresentation of a material fact (if the party knew the truth, that party would not have entered into the contract) makes a contract voidable.

According to Gordon v. Selico it is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation.

Both an order for specific performance and an injunction are discretionary remedies, originating for the most part in equity. Neither is available as of right and in most jurisdictions and most circumstances a court will not normally order specific performance. A contract for the sale of real property is a notable exception. In most jurisdictions, the sale of real property is enforceable by specific performance. Even in this case the defenses to an action in equity (such as laches, the bona fide purchaser rule, or unclean hands) may act as a bar to specific performance.

Related to orders for specific performance, an injunction may be requested when the contract prohibits a certain action. Action for injunction would prohibit the person from performing the act specified in the contract.

MisrepresentationMisrepresentation is a contract law concept. It means a false statement of fact made by one party to another party, which has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.

According to Gordon v Selico (1986) 18 HLR 219 it is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation. If one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact.

Representation is not a term

As enacted by the Misrepresentations Act, the statement in question may constitute a representation even if later incorporated into the contract as a term (i.e. a warranty, condition or innominate term).

An alternative approach, applied in parallel but in exclusivity to, is to find a collateral contract by interpreting the representation as a promise accompanied by some sort of consideration (see Heilbut, Symons & Co. v Buckleton [1913] A.C. 30 (H.L.)). The collateral contract will have the effect of adding the representation as a term to the contract.

If the representation is found to be a term then the normal remedies for breach of contract apply.

Criteria for Misrepresentation

Misrepresentation is one of several vitiating factors which can affect the validity of a contract. A misrepresentation occurs when one party makes a false statement with the intention of inducing another party to contract. For an action to be successful, some criteria must be met in order to prove a misrepresentation. These include:

A false statement of fact has been made, The statement was directed at the suing party and

The statement had acted to induce the suing party to contract.

Distortion of Fact

A representor may make a statement which prima facie is technically true; however this may tell only half the story. If a statement of fact is made but the representor fails to include information which would significantly alter the interpretation of this fact, then a misrepresentation may have occurred. In Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563, Krakowski agreed to enter into a contract to buy a shop premises from Eurolynx as long as a 'strong tenant' had been organised. The contract proceeded on the grounds that such a tenant had been arranged. Unbeknown to Krakowski, Eurolynx had entered into an additional agreement with the tenant to provide funds for the first three months rent to ensure the contract went ahead. When the tenant defaulted on the rent and subsequently vacated the premises, Krakowski found out about the additional agreement and rescinded the contract with Eurolynx. It was held that Eurolynx’s failure to disclose all material facts about the 'strong tenant' was enough to constitute a misrepresentation and the contract could be rescinded on these grounds.

Learned Falsity

The negotiating stage of a contract can be a time consuming process. Because of this, new information may arise and circumstances may change. This can result in two situations which

can result in a misrepresentation if silence is kept. The first is if the representor subsequently discovers that the statement was false, the second being if the statement becomes false at a later time. If a statement is made and it is subsequently made known to the representor that it is false, it would obviously be inequitable to allow the representor to remain silent with the new information. In Lockhart v. Osman [1981] VR 57, an agent had advertised some cattle as being “well suited for breeding purposes”. Later on it was discovered that the stock had been exposed to a contagious disease which affected the reproductive system. It was held that the agent had a duty to take remedial action and correct the representation. The failure by the agent to take such measures resulted in the contract being set aside. Should a statement be made which is true at the time, but subsequently becomes untrue due to a change in circumstances, the representor is obligated to amend the original statement. In With v O’Flanagan [1936] Ch. 575, the plaintiff entered into a contract to purchase O’Flanagan’s medical practice. During negotiations it was said that the practice produced an income of £2000 per year. Before the contract was signed, the practice took a downward turn and lost a significant amount of value. After the contract had been entered into the true nature of the practice was discovered and the plaintiff took action in misrepresentation. In his decision, Lord Wright said "...a representation made as a matter of inducement to enter into a contract is to be treated as a continuing representation.". This means that the representation must be true till the contract is made; creating the obligation mentioned above and accordingly the plaintiff’s petition was successful.

Special Relationships

Some relationships also provide that silence can form the basis of an actionable misrepresentation.

Fiduciary Relationships

A fiduciary relationship is one of trust and confidence; it involves one party acting for the benefit of another. For this reason, when entering into a contract, it is important for a fiduciary to disclose all facts which could be considered material even if not expressly asked about. In Lowther v Lord Lowther (1806) 13 Ves Jr 95, the plaintiff handed over a picture to an agent for sale. The agent knew of the pictures true worth yet bought it for a considerably lower price. The plaintiff subsequently discovered the pictures true worth and sued to rescind the contract. It was held that the defendant was in a fiduciary relationship with the plaintiff and accordingly assumed an obligation to disclose all material facts. Accordingly the contract could be rescinded.

Contracts ‘Uberrimae Fidei’

A contract uberrimae fidei is a contract of ‘utmost good faith’. Similarly to fiduciary relationships, the parties are required to make known all material facts influencing the contract. Contracts uberrimae fidei usually arise when one party has knowledge which the other does not have access to. Contracts which are commonly considered to be of such a nature include contracts of insurance and family agreements. When applying for insurance, the person or entity must disclose all material facts so that the insurer can properly asses the risk involved with the offering of insurance. Since the insurer cannot have access to all information relating to the insured and their situation which could affect the risk involved, it is necessary for this disclosure so that both parties are entering into the contract on equal grounds. Lord Blackburn addressed the issue in Brownlie v Campbell (1880) 5 App Cas 925 when he noted "...the concealment of a material circumstance known to you...avoids the policy." Another contract considered uberrimae fidei is that of family agreements. In Gordon v Gordon (1821) 3 Swan 400, two brothers had reached an agreement regarding the family estate. The elder brother was under the impression that he was born out of wedlock and thus not their fathers true heir. The agreement was reached on this basis. The elder brother subsequently discovered that this was not the case and that the younger brother had knowledge of this during the negotiation of the settlement. The elder brother sued to set aside the agreement and was successful on the grounds that such a contract was one of uberrimae fidei and the required disclosure had not been executed.

Statement of Fact

It is a general requirement that for an action in misrepresentation to proceed, that the statement in question be one of present or past fact. This has its grounding in that only facts can be distinguished as being true or untrue at the time they are made.

Opinion

Statements of opinion are not often seen as sufficient to produce a misrepresentation. Obviously it would be unreasonable to treat opinions in the same manner as truths as opinions can be based purely on personal beliefs with no additional foundation. There are however some exceptions where opinions can give rise to an action in misrepresentation:

where an opinion is expressed yet this opinion is not actually held by the representor, where it is implied that the representor has facts on which to base the opinion,

or where one party should have known facts on which such an opinion would be based.

Intention and the Future

Statements which are made in relation to the intention of a party or the occurrence of some event in the future do not constitute misrepresentations should they fail to eventuate. This is because at the time the statements were made they can not be categorised as either true or false. However, similarly to the first point above, an action can be brought if the intention never actually existed. This can be illustrated by the decision in Edgington v Fitzmaurice (1885) 29 Ch. D. 459, which deals with a statement of intention by the directors of a company to use loaned money to alter company buildings and make purchases to expand the company’s operating options. It was found that the directors actually intended to repay current debts and according it was held by the judges that the contract was voidable.

Law

Statements of law were, in the past, considered to be free from claims of misrepresentation because it is equally accessible by both parties and is "...as much the business of the plaintiff as of [the defendants] to know what the law [is].". This has since changed and it is now more recognised that statements of law should be treated as akin to statements of fact rather than occupy a special isolation. As stated by Lord Denning "...the distinction between law and fact is very illusory.".

Statement to the Misled

An action in misrepresentation can only be brought by a representee. This means that only those who were an intended party to the representation can sue. This principle can be seen in Peek v Gurney (1873) LR 6 HL 377, where the plaintiff sued the directors of a company for indemnity. The action failed because it was found that the plaintiff was not a representee (an intended party to the representation) and accordingly misrepresentation could not be a protection. It is not required that in order to be a representee, the representation must be received directly. It is sufficient that the representation was made to another party with the intention that it would be made known to a subsequent party and ultimately acted upon by them as a representee.

Types of misrepresentation

Four types of misrepresentations are identified with different remedies available:

Fraudulent misrepresentation occurs when one makes representation with intent to deceive and with the knowledge that it is false. An action for fraudulent misrepresentation allows for a remedy of damages and rescission. One can also sue for fraudulent misrepresentation in a tort action. Fraudulent misrepresentation is capable of being made recklessly.

Negligent misrepresentation at common law occurs when the defendant carelessly makes a representation while having no reasonable basis to believe it to be true. This type of misrepresentation is relatively new and was introduced to allow damages in situations where neither a collateral contract nor fraud is found. It was first seen in the case of Hedley Byrne v Heller [1964] A.C. 465 where the court found that a statement made negligently that was relied

upon can be actionable in tort. Lord Denning in Esso Petroleum Co. Ltd. v Mardon [1976] Q.B. 108 however, transported the tort into contract law, stating the rule as:

if a man, who has or professes to have special knowledge or skill, makes a representation by

virtue thereof to another…with the intention of inducing him to enter into a contract with him,

he is under a duty to use reasonable care to see that the representation is correct, and that the

advice, information or opinion is reliable

Negligent misrepresentation under Statute, enacted by the Misrepresentation Act 1967. When dealing with a negligent misrepresentation it is most lucrative (joint with fraudulent misrepresentation, Contributory Negligence notwithstanding) for an action to be brought under statute law as the burden of proof that is required passes to the person who made the statement. So it is for the person who made the negligent statement to prove that the statement was either not one of fact but opinion and that "had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true" - the so-called innocent defence.

This creates an inconsistency of law due to the low burden and damages being calculated as extensive as those under fraudulent misrepresentation whereby a "wicked mind" is the basis of action. It is, to use the words of Rix J, "a mighty weapon". Due to academic and judicial criticism in this area, the law is ripe for reform - probably adjusting the measure of damages to that of negligent misrepresentation at common law.

Innocent misrepresentation (Derry v. Peek)occurs when the representor had reasonable grounds for believing that his or her false statement was true. Prior to Hedley Byrne, all misrepresentations that were not fraudulent were considered to be innocent. This type of representation primarily allows for a remedy of rescission, the purpose of which is put the parties back into a position as if the contract had never taken place. Section 2(2) Misrepresentation Act 1967, however, allows for damages to be awarded in lieu of rescission if the court deems it equitable to do so. This is judged on both the nature of the innocent misrepresentation and the losses suffered by the claimant from it.

Misrepresentation (in India under IPC section-90)

In India, the federal laws defines misrepresentation under "Misconception Of Fact". This is dealt with under the Indian Penal Code in Section 90, which states:

Consent given firstly under fear of injury, and secondly under a misconception of fact, is not consent at all.

That is what is explained in the first part of Section 90. There are two grounds specified in Section 90 which are analogous to coercion and mistake of fact which are the familiar grounds that can vitiate a transaction under the jurisprudence of India and other countries. The factors set out in first part of Section 90 are from the point of view of the victim; the second part of Section 90 enacts the corresponding provision from the point of view of the accused. It

envisages that the accused has knowledge of - or reason to believe that - the consent was given by the victim in consequence of fear of injury or misconception of fact. Thus the second part lays emphasis on the knowledge or reasonable belief of the person who obtains the tainted consent. The requirements of both parts should be cumulatively satisfied. In other words, the Court has to determine whether the person giving the consent has done so under fear or misconception of fact; the court should also be satisfied that the person doing the act (i.e. the alleged offender) is conscious of the fact or should have reason to think that but for the fear or misconception, the consent would not have been given. This is the scheme of Section 90 which is couched in negative terminology.

Remedies

Rescission

Generally, the effect of misrepresentation is that it makes the contract voidable not void ab initio. This is important for two reasons. Firstly because the representee can continue to be bound by the contract at his or her will. Secondly because the transactions and effects of the (voided) contract are recognised as to have taken place, therefore if a party transfers title of property to a third party of which the former only holds title to pursuant to the voided contract, the third party can retain legal title. Rescission can be done either by informing the representor or by requesting an order from the court. There are certain circumstances where rescission is not possible though. The idea behind rescission is that the parties are restored to the positions they were before entering into the contract. Therefore, if this is not possible, rescission is not an option.

If the representee discovers the misrepresentation and fails to take steps to avoid the contract, then he may not be able to rescind it. The time limit for taking such steps varies depending on the type of misrepresentation. In cases of fraudulent misrepresentation, the time limit runs until when the misrepresentation ought to have been discovered, whereas in innocent misrepresentation, the right to rescission may lapse even before the representee can reasonably be expected to know about it.

In certain circumstances, third party rights may interfere with rescission and render it impossible. For example, if B contracts with A to sell a house with a misrepresentation and then A sells the house to C, the courts are not likely to permit rescission as that would require C to give up the house.

In England and Wales, under Misrepresentations Act 1967 s. 2(2) of the Misrepresentation Act 1967, the court has the discretion to award damages instead of rescission.

Damages

In cases of fraudulent misrepresentation, a claim for damages is under the tort of deceit, making the damages tortious, in other words, only actual losses are recoverable. If the losses are calculated under the Misrepresentation Act 1967, damages for misrepresentation are calculated as if the defendant had been fraudulent, even if he has been only negligent. This is a wider scope than usual tortious liability, as it protects the claimant's loss even if not reasonably foreseeable. Inclusion of the representation into the contract as a term will leave the remedy for breach in damages as a common law right. The difference is that damages for misrepresentation usually reflect C's reliance interest, whereas damages for breach of contract protect C's expectation interest, although the rules on mitigation will apply in the latter case. In certain cases though, the courts have awarded damages for loss of profit, basing it on loss of opportunity.

Procedure

In the United States, in order to obtain damages for breach of contract or to obtain specific performance or other equitable relief, the aggrieved injured party may file a civil (non-criminal) lawsuit in state court (unless there is diversity of citizenship giving rise to federal jurisdiction). If the contract contains an arbitration clause, the aggrieved party must submit an arbitration claim in accordance with the procedures set forth in the agreement.

Many contracts provide that all disputes arising thereunder will be resolved by arbitration, rather than litigated in courts. Customer claims against securities brokers and dealers are almost always resolved by arbitration because securities dealers are required, under the terms of their membership in self-regulatory organizations such as the Financial Industry Regulatory Authority (formerly the NASD) or NYSE to arbitrate disputes with their customers. The firms then began including arbitration agreements in their customer agreements, requiring their customers to arbitrate disputes.On the other hand, certain claims have been held to be non-arbitrable if they implicate a public interest that goes beyond the narrow interests of the parties to the agreement (i.e., claims that a party violated a contract by engaging in illegal anti-competitive conduct or civil rights violations). Arbitration judgments may generally be enforced in the same manner as ordinary court judgments. However, arbitral decisions are generally immune from appeal in the United States unless there is a showing that the arbitrator's decision was irrational or tainted by fraud. Virtually all states have adopted the Uniform Arbitration Act to facilitate the enforcement of arbitrated judgments. Notably, New York State, where a sizable portion of major commercial agreements are executed and performed, has not adopted the Uniform Arbitration Act.

In England and Wales, a contract may be enforced by use of a claim , or in urgent cases by applying for an interim injunction to prevent a breach. Likewise, in the United States, an

aggrieved party may apply for injunctive relief to prevent a threatened breach of contract, where such breach would result in irreparable harm that could not be adequately remedied by money damages.

Other contract

Online contracts, which are easily made, are usually valid on a smaller scale for a period of one to three months, while on a larger scale can last about five years. As with all things legal, especially in regards to the ever-evolving internet, general rules like length of validity have many exceptions. All cases are evaluated on their own merits, and those merits are defined by the facts presented in each instance. It is up to the owner of the site to do what it can to guarantee enforceability of its contracts. Though 90% of people sign online contracts before reading the content, E-signature laws have made the electronic contract and signature as legally valid as a paper contract. It has been estimated that roughly one hundred and ten electronic contracts are signed every second.

Contract theory

Contract theory is the body of legal theory that addresses normative and conceptual questions in contract law. One of the most important questions asked in contract theory is why contracts are enforced. One prominent answer to this question focuses on the economic benefits of enforcing bargains. Another approach, associated with Charles Fried, maintains that the purpose of contract law is to enforce promises. This theory is developed in Fried's book, Contract as Promise. Other approaches to contract theory are found in the writings of legal realists and critical legal studies theorists.

More generally, writers have propounded Marxist and feminist interpretations of contract. Attempts at overarching understandings of the purpose and nature of contract as a phenomenon have been made, notably 'relational contract theory' originally developed by U.S. contracts scholars Ian Roderick Macneil and Stewart Macaulay, building at least in part on the contract theory work of U.S. scholar Lon L. Fuller, while U.S. scholars have been at the forefront of developing economic theories of contract focussing on questions of transaction cost and so-called 'efficient breach' theory.

Another dimension of the theoretical debate in contract is its place within, and relationship to a wider law of obligations. Obligations have traditionally been divided into contracts, which are voluntarily undertaken and owed to a specific person or persons, and obligations in tort which are based on the wrongful infliction of harm to certain protected interests, primarily imposed by the law, and typically owed to a wider class of persons.

Recently it has been accepted that there is a third category, restitutionary obligations, based on the unjust enrichment of the defendant at the plaintiff’s expense. Contractual liability, reflecting the constitutive function of contract, is generally for failing to make things better (by

not rendering the expected performance), liability in tort is generally for action (as opposed to omission) making things worse, and liability in restitution is for unjustly taking or retaining the benefit of the plaintiff’s money or work.

The common law describes the circumstances under which the law will recognise the existence of rights, privilege or power arising out of a promise.

Contract theoryIn economics, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of asymmetric information. Because of its connections with both agency and incentives, contract theory is often categorized within a field known as Law and economics. One prominent application of it is the design of optimal schemes of managerial compensation. In the field of economics, the first formal treatment of this topic was given by Kenneth Arrow in the 1960s.

A standard practice in the microeconomics of contract theory is to represent under certain numerical utility structure the behaviour of a decision maker, and then find her optimal choices by applying an optimization algorithm. Such a procedure has been used in the contract theory framework to several typical situations, labeled moral hazard, adverse selection and signalling. The spirit of these models lies in finding theoretical ways to motivate agents to take appropriate actions, even under an insurance contract. The main results achieved through this family of models may involve: mathematical properties of the utility structure of the principal and the agent, relaxation of assumptions, and variations of the time structure of the contract relationship, among others. It is customary to model people as maximizers of some von Neumann-Morgenstern utility functions, as stated by Expected utility theory.

Main models of agency problems

Moral hazard

In moral hazard models, the information asymmetry is the principal's inability to observe and/or verify the agent's action. Performance-based contracts that depend on observable and verifiable output can often be employed to create incentives for the agent to act in the principal's interest. When agents are risk-averse, however, such contracts are generally only second-best because incentivization precludes full insurance.

The typical moral hazard model is formulated as follows. The principal solves:

subject to the agent's "individual rationality (IR)" constraint,

and the agent's "incentive compatibility (IC)" constraint,

,

where is the wage as a function of output y, which in turn is a function of effort e. c(e) represents the cost of effort, and reservation utility is given by .

Adverse selection

In adverse selection models, the principal is not informed about a certain characteristic of the agent. For example, health insurance is more likely to be purchased by people who are more likely to get sick.

Incomplete contracts

Contract theory also utilizes the notion of a complete contract, which is thought of as a contract that specifies the legal consequences of every possible state of the world. More recent developments known as the theory of incomplete contracts, pioneered by Oliver Hart and his coauthors, study the incentive effects of parties' inability to write complete contingent contracts, e.g. concerning relationship-specific investments.

Because it would be impossibly complex and costly for the parties to an agreement to make their contract complete, the law provides default rules which fill in the gaps in the actual agreement of the parties.

During the last 20 years, much effort has gone into the analysis of dynamic contracts. Important early contributors to this literature include, among others, Edward J. Green, Stephen Spear, and Sanjay Srivastava.

Examples

George Akerlof described adverse selection in the market for used cars. In certain models, such as Michael Spence's job-market model, the agent can signal his type to

the principal which may help to resolve the problem.

National contract law

German contract law

English contract law

Australian contract law

German contract law

German contract law is found in the Bürgerliches Gesetzbuch, in both the "Allgemeine Teil" and the chapter on "Schuldrecht". It forms part of the general law of obligations

English contract lawEnglish contract law is an influential body of law regulating the law of contract that operates in England and Wales. Its doctrines form the basis of contract law across the Commonwealth, including Australia, Canada, New Zealand contract law, India and South Africa, as well as the United States and the wider common law world. It also influences international law.

According to legal scholar Sir John William Salmond, a contract is "an agreement creating and defining the obligations between two or more parties".

Formation

In English law, there are three key requirements for the creation of a contract. These are agreement, consideration and an intention to create legal relations. To these key requirements, others can be added. For instance, in contracts for land formal requirements (i.e. writing the contract down and having it witnessed) are necessary to effect a sale. Also, parties to a contract must have the capacity to contract and must be freely exercising their informed consent to the agreement.

Agreement

The Carbolic Smoke Ball offer

The most important feature of a contract is that one party makes an offer that another accepts. Often it is said that there should be a "meeting of the minds" of two or more parties. The classic case on contractual formation is Carlill v Carbolic Smoke Ball Company. A quack-medicine firm advertised that its new wonder drug, a smoke ball, would cure the flu, and if it did not, buyers would receive £100. When sued, Carbolic argued the ad was not to be taken as a serious, legally binding offer. But the Court of Appeal held that it would appear to a reasonable man that Carbolic had made a serious offer. "Read the advertisement how you will, and twist it about as you will," said Lindley LJ, "here is a distinct promise expressed in language which is perfectly unmistakable". The court construed the advertisement as an offer which was accepted by consumers when they followed the guidelines in the advertisement.

Carlill raises another two main points about agreement in English law. Firstly, it shows that advertisements can be construed as offers, though this is not the case for a standard advertisement. Advertisements are usually taken to be "invitations to treat" (invitatio ad offerendum in Latin), or representations made to invite somebody to bargain with the seller. Although there are statutes regulating misleading advertising and stiff penalties awaiting those who do not comply, English common law holds to the idea that a seller should not be bound by advertisements. The same is said for goods on display in a shop invitations to bid at an auction or invitations to tender. A number of rationales can be put forward. For instance, if an advert is seen by a million people, it would be absurd that the court should compel a business to supply a million items to customers who had turned up to "accept" the "offer". Hence the court construes advertisements as representations which are not yet binding offers, but an invitation to customers for offers. A second argument is that if some price were mistakenly advertised, it would be unfair to compel a vendor to give away their stock because a customer had "snapped it up." A third argument is that a seller should not be compelled to sell to whoever walks into

the store, but should retain the freedom to contract with whom he chooses. However, the freedom of sellers to make representations and change their mind is at odds with widely accepted Principles of European Contract Law and the problems raised can be met through an objective interpretation of offers or a simply more modern approach. First, every reasonable person knows that goods advertised or displayed in shops are implicitly available "while stocks last". Second, reasonable people also will detect when a price looks unreasonably low. A court would not construe an offer for a car at £10, when plainly three zeros were missing. And third, it may not be desirable today for sellers to retain discretion over whom they contract with when there is a risk of discrimination.

The second main point raised by Carlill is that the default rule is that acceptance of offers must be communicated. In Carlill the Carbolic Smoke Ball Co had implicitly waived any need for a user to communicate their acceptance of the offer to the company. But usually, an offeree must ensure that his acceptance has been heard and cannot count on any contract being formed until that point. This is the case for every form of communication, except, it appears, for the post. A series of cases dating from the early 19th century established that when it is reasonable to use post to communicate acceptance of an offer, and it does not cause "manifest absurdity", then acceptance is effective when a letter is put into the postbox - not when the letter arrives. Known as the "postal rule", this has been subject to withering judicial comment from its very early days and is entirely out of tune with the general law, or that in civil law systems. One possible virtue is that an acceptance of an offer cannot be revoked once it is posted. But in practice the rule functions mainly as a curiosity for introductory contract courses, and a favourite for easy problem questions.

Consideration and estoppel

Consideration is a controversial requirement for contracts under common law, and is not necessary in civil law systems. The idea is that both parties to a contract must bring something to the bargain for a court to enforce the contract. This can be either conferring an advantage on the other party, or incurring some kind of detriment or inconvenience, or in its classic formulation by Lush LJ in Currie v Misa,

A valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other'.

So for instance, the consideration that Mrs Carlill provided was held to be going to the "distinct inconvenience" of using the faulty Carbolic Smoke Ball. According to Treitel, "consideration" in English law is a requirement that every contract must be supported by something of "economic value" from all parties, distinguished from ostensibly intangible things such as "natural affection". However, while it is meant to be a requirement that every contract is supported by "consideration" - or something of economic value - the courts have consistently held that consideration need not be adequate. Proverbially, a peppercorn is still a good consideration to

buy a house, even if the seller does not like pepper and will throw away the corn. Bad bargains are still upheld, because the courts' policy is to not enquire into the fairness of the exchange.

A simple promise to do something in the future is generally a good consideration. But courts have held that if something is given or promised in return for a service provided in the past, the past consideration is not a good consideration. Similarly, the promise of a person to perform a task they were already under a duty to do is apparently no good consideration. In the classic case, Stilk v Myrick a group of sailors agreed to sail back to England from Kronstadt in return for higher wages (taken from sailors who had deserted). When they got home and asked the captain for their extra money, the court held they had already agreed to sail back, so gave no good consideration for any extra pay. This rule has been largely undermined in two ways. Firstly, in Williams v Roffey Bros Ltd, the Court of Appeal held that it may find that there are "practical benefits" involved when someone promises to perform a pre-existing duty. Secondly, the equitable doctrine of estoppel may circumvent the rule, in certain circumstances. If a contracting party gives an assurance, on which the other reasonably relies and it would be "inequitable" (i.e. unfair) to go back on that assurance, then the court denies the first party the power to enforce his strict legal rights. So, for instance, if a landlord tells a tenant that they may pay lower rent during the war, and the tenant reasonably relies on that assurance, and it would be unfair for the landlord to go back on it, then the court will hold the landlord is "estopped" from later going back on the promise and demanding the higher rent (Central London Property Trust Ltd v High Trees House Ltd). This kind of "promissory estoppel" (as opposed to proprietary estoppel), however, is merely "suspensory" of legal rights and can only be used to prevent legal rights being enforced against oneself, rather than be creative of them. Moreover, it probably cannot be used to circumvent obligations for payments of debt. The House of Lords case, Foakes v Beer decided that a lender who assured a borrower (in financial difficulty) he could repay a smaller sum than he owed could legitimately demand full payment after the agreed part payment had already been made.

The restrictive approach to part payments of debt was questioned by Lord Blackburn in Foakes itself, and has been questioned in a recent English case, and indeed the whole notion that estoppel cannot be creative of legal rights has been thrown out in other common law countries, such as Australia. Moreover, a number of commentators, including Atiyah have suggested that the formal "economic value" approach to consideration be entirely abandoned as a basis for contracts, and that instead courts should simply look for a "good reason" to enforce agreements. Civil law systems take the approach that an exchange of promises, or a concurrence of wills alone, rather than an exchange in valuable rights is the correct basis for an enforceable agreement, subject to certain checks, such as that agreements are made seriously, and not merely in a social context.

Creating legal relations

There is a presumption for commercial agreements that parties intend to be legally bound (unless the parties expressly state that they do not want to be bound like in heads of agreement. On the other hand, many kinds of domestic and social agreements are

unenforceable on the basis of public policy, for instance between children and parents. One early example is found in Balfour v Balfour. Using contract-like terms, Mr Balfour had agreed to give his wife £30 a month as maintenance while he was living in Ceylon (Sri Lanka). Once he left, they separated and Mr Balfour stopped payments. Mrs Balfour brought an action to enforce the payments. At the Court of Appeal, the Court held that there was no enforceable agreement as there was not enough evidence to suggest that they were intending to be legally bound by the promise.

The case is often cited in conjunction with Merritt v Merritt. Here the court distinguished the case from Balfour v Balfour because Mr and Mrs Merritt, although married again, were estranged at the time the agreement was made. Therefore any agreement between them was made with the intention to create legal relations.

Jones v Padavatton [1969] 1 WLR 328 Rose & Frank Co v JR Crompton & Bros Ltd [1925] AC 445

Kleinwort Benson Ltd v Malaysia Mining Corp Berhad [1989] 1 WLR 379

Baird Textile Holdings Ltd v Marks & Spencer plc [2002] 1 All ER (Comm.) 737

Privity

The doctrine of privity of contract means that only those involved in striking a bargain would have standing to enforce it. This is illustrated by Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd. This rule came under some well aimed criticism from judges, particularly Lord Denning, who attempted to overhaul it (though was ultimately overturned). In recent years the rule of privity has eroded somewhat and third party beneficiaries have been allowed to recover damages for breaches of contracts they were not party to. Additionally, exclusion clauses have been found to extend to third parties in some situations. There are two times where third party beneficiaries are allowed to fall under the contract. The duty owed test looks to see if the third party was agreeing to pay a debt for the original party. The intent to benefit test looks to see if circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. Any defense allowed to parties of the original contract extend to third party beneficiaries. The law has been reformed recently by the introduction of the Contracts (Rights of Third Parties) Act 1999.

Nisshin Shipping Co Ltd v Cleaves & Co Ltd [2004] 1 Lloyd’s Rep 38 Jackson v Horizon Holidays Ltd [1975] 3 All ER 92

Woodar Investment Development Ltd v Wimpey Construction [1980] 1 All ER 571

Linden Gardens Trust Ltd v Lenesta Sludge Disposals [1994] 1 AC 85

Terms

A contractual term is "[a]ny provision forming part of a contract"[34] Each term gives rise to a contractual obligation, breach of which can give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as they are peripheral to the objectives of the contract.

Incorporation

L'Estrange v F Graucob Ltd , on signatures Parker v South Eastern Railway Company (1877) 2 CPD 416

Thompson v London, Midland and Scottish Railway Co [1930] 1 KB 41

Olley v Marlborough Court [1949] 1 KB 532

Hollier v Rambler Motors Ltd [1972] 1 All ER 399

Interpretation

English courts decide from the evidence in the case whether it looked like there was offer and acceptance from the point of view of a reasonable person. In other words, courts do not ask what the parties subjective intentions were, but what meaning was communicated from the viewpoint of a reasonable person. The courts look for objective agreement, not subjective intentions. That said, the paramount task, is still to give effect to the intentions of the parties.

ICS v West Bromwich Canada Steamship Lines v R [1952] AC 192

Curtis v Chemical Cleaning and Dyeing Co [1951] 1 KB 805

McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125

Implication

A Term is implied when the courts deem a provision to be reasonable to be included in all contracts. Statutes may also imply terms, and this is particularly common for employment contracts or consumer contracts. Terms may be implied due to the facts of the proceedings by which the contract was formed. The Privy Council established a five stage test in BP Refinery Western Port v Shire of Hastings. to determine situations where the facts of a case may imply terms (this only applies to formal contracts in Australia). Liverpool City Council v Irwin [1976] 2 WLR 562

Wong Mee Wan v Kwan Kin Travel Services Ltd [1995] 4 All ER 745, established that when a tour operator contracts to for the sale of goods. The most important legislation under United Kingdom law is the Sale of Goods Act 1979, the Consumer Protection

(Distance Selling) Regulations 2000 and the Supply of Goods and Services Act 1982 which imply terms into all contracts whereby goods are sold or services provided.

The Moorcock (1889) 14 PD 64

Paragon Finance plc v Nash [2002] 1 WLR 685

Unfair terms

George Mitchell v Finney Lock Seeds Unfair Contract Terms Act 1977 regulates unreasonable unfair contract terms such as

exclusions for liability.

Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083)

The Mikhail Lermontov [1990] 1 Lloyd's Rep 579, (1993) 176 CLR 344

Breach of contract

A breach of contract is failure to perform as stated in the contract. There are many ways to remedy a breached contract assuming it has not been waived. Typically, the remedy for breach of contract is an award of money damages. When dealing with unique subject matter, specific performance may be ordered.

As for many governments, it was not possible to sue the Crown in the UK for breach of contract before 1948. However, it was appreciated that contractors might be reluctant to deal on such a basis and claims were entertained under a petition of right that needed to be endorsed by the Home Secretary and Attorney-General. S.1 Crown Proceedings Act 1947 opened the Crown to ordinary contractual claims through the courts as for any other person.

Termination

Condition or Warranty. Conditions are terms which go to the very root of a contract. Breach of these terms repudiate the contract, allowing the other party to discharge the contract. A warranty is not so imperative so the contract will subsist after a breach. Breach of either will give rise to damages.

It is an objective matter of fact whether a term goes to the root of a contract. By way of illustration, an actress' obligation to perform the opening night of a theatrical production is a

condition, whereas a singers obligation to perform during the first three days of rehearsal is a warranty.

Statute may also declare a term or nature of term to be a condition or warranty; for example the Sale of Goods Act 1979 s15A provides that terms as to title, description, quality and sample (as described in the Act) are conditions save in certain defined circumstances.

Lord Diplock , in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, created the concept of an innominate term, breach of which may or not go to the root of the contract depending upon the nature of the breach. Breach of these terms, as with all terms, will give rise to damages. Whether or not it repudiates the contract depends upon whether legal benefit of the contract has been removed from the innocent party. Megaw LJ, in 1970, preferred the use of the classic categorising into condition or warranty due to legal certainty. This was interpreted by the House of Lords as merely restricting its application in Reardon Smith Line Ltd. v Hansen-Tangen. Status as a term is important as a party can only take legal action for the non fulfillment of a term as opposed to representations or mere puffs. Legally speaking only statements that amount to a term create contractual obligations. There are various factor that a court may take into account in determining the nature of a statement

Damages

There are four different types of damages.

Compensatory damages which are given to the party which was detrimented by the breach of contract. With compensatory damages, there are two kinds of branches, consequential damages and direct damages.

Nominal damages which include minimal dollar amounts (often sought to obtain a legal record of who was at fault).

Punitive damages which are used to punish the party at fault. These are not usually given regarding contracts but possible in a fraudulent situation.

Exemplary damages which are used to make an example of the party at fault to discourage similar crimes. Fines can be multiplied by factors of up to 50 for such damages.

Compensatory damages (or expectation damages) are awarded to put the party in as good of a position as the party would have been in, had the contract been performed as promised. They must be certain, not estimates of what the party could have benefited if the contract had been

performed. Furthermore, once a breach has occurred, the non-breaching party has a duty to mitigate damages, or cover. Damages are not recoverable for harm that the plaintiff should have foreseen and could have avoided by reasonable effort without undue risk, expense, or humiliation. The UCC states, "Consequential damages... include any loss... which could not reasonably be prevented by cover or otherwise." UCC 2-715.

Hadley v Baxendale establishes general and consequential damages. General damages are those damages which naturally flow from a breach of contract. Consequential damages are those damages which, although not naturally flowing from a breach, are naturally supposed by both parties at the time of contract formation. An example would be when someone rents a car to get to a business meeting, but when that person arrives to pick up the car, it is not there. General damages would be the cost of renting a different car. Consequential damages would be the lost business if that person was unable to get to the meeting, if both parties knew the reason the party was renting the car. However, there is still a duty to cover; the fact that the car was not there does not give the party a right to not attempt to rent another car.

Whenever you have a contract that requires completing something, and a person informs you that it will not be completed before they begin your project, this is referred to anticipatory breach. When it is either not possible or desirable to award damages measured in that way, a court may award money damages designed to restore the injured party to the economic position that he or she had occupied at the time the contract was entered (known as the "reliance measure"), or designed to prevent the breaching party from being unjustly enriched ("restitution").

Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 J & H Ritchie Ltd v Lloyd Ltd [2007] UKHL 9

Specific performance

There may be circumstances in which it would be unjust to permit the defaulting party simply to buy out the injured party with damages. For example where an art collector purchases a rare painting and the vendor refuses to deliver, the collector's damages would be equal to the sum paid.

The court may make an order of what is called "specific performance", requiring that the contract be performed. In some circumstances a court will order a party to perform his or her promise (an order of "specific performance") or issue an order, known as an "injunction," that a party refrain from doing something that would breach the contract. A specific performance is obtainable for the breach of a contract to sell land or real estate on such grounds that the property has a unique value.

Both an order for specific performance and an injunction are discretionary remedies, originating for the most part in equity. Neither is available as of right and in most jurisdictions and most circumstances a court will not normally order specific performance. A contract for the sale of real property is a notable exception. In most jurisdictions it is enforceable by specific performance. However, even in this case the defenses to an action in equity (such as laches, the bona fide purchaser rule, or unclean hands) may act as a bar to specific performance.

Related to orders for specific performance, an injunction may be requested when the contract prohibits a certain action. Action for injunction would prohibit the person from performing the act specified in the contract.

Setting aside the contract

There can be three different ways in which contracts can be set aside. A contract may be deemed 'void', 'voidable' or 'unenforceable'. Voidness implies that a contract never came into existence. Voidability implies that one or both parties may declare a contract ineffective at their wish. Unenforceability implies that neither party may have recourse to a court for a remedy. Recission is a term which means to take a contract back.

Iniquitous pressure

Duress has been defined as a "threat of harm made to compel a person to do something against his or her will or judgment; esp., a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition." An example is in Barton v Armstrong, a decision of the Privy Council. Armstrong threatened to kill Barton if he did not sign a contract, so the court set the contract aside. An innocent party wishing to set aside a contract for duress to the person need only to prove that the threat was made and that it was a reason for entry into the contract; the onus of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract. There can also be duress to goods and sometimes, the concept of 'economic duress' is used to vitiate contracts.

Undue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person. The law presumes that in certain classes of special relationship, such as between parent and child, or solicitor and client, there will be a special risk of one party unduly influencing their conduct and motives for contracting. As an equitable doctrine, the court has the discretion to vitiate such a contract. When no special relationship exists, the general rule is whether there was a relationship of such trust and confidence that it should give rise to such a presumption.

Misrepresentation

Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.

There are two types of misrepresentation in contract law, fraud in the factum and fraud in inducement. Fraud in the factum focuses on whether the party in question knew they were creating a contract. If the party did not know that they were entering into a contract, there is no meeting of the minds, and the contract is void. Fraud in inducement focuses on misrepresentation attempting to get the party to enter into the contract. Misrepresentation of a material fact (if the party knew the truth, that party would not have entered into the contract) makes a contract voidable.

Misrepresentation can be found not only where a fact turns out not to be true, but where a correct fact becomes false prior to contracting. Gordon v Selico establishes it is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation. If one party claims specialist knowledge on the topic discussed, then it is more likely for the courts to hold a statement of opinion by that party as a statement of fact.

Mistakes

A mistake is an incorrect understanding by one or more parties to a contract and may be used as grounds to invalidate the agreement. Common law has identified three different types of mistake in contract: unilateral mistake, mutual mistake, and common mistake.

A unilateral mistake is where only one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage of the mistake. It is also possible for a contract to be void if there was a mistake in the identity of the contracting party. An example is in Lewis v Averaywhere Lord Denning MR held that the contract can only be avoided if the plaintiff can show that, at the time of agreement, the plaintiff believed the other party's identity was of vital importance. A mere mistaken belief as to the credibility of the other party is not sufficient.

A mutual mistake is when both parties of a contract are mistaken as to the terms. Each believes they are contracting to something different. The court usually tries to uphold such a mistake if a reasonable interpretation of the terms can be found. However, a contract based on a mutual mistake in judgement does not cause the contract to be voidable by the party that is adversely affected. See Raffles v Wichelhaus.

A common mistake is where both parties hold the same mistaken belief of the facts. This is demonstrated in the case of Bell v Lever Brothers Ltd., which established that common mistake can only void a contract if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible.

Frustration

A contract may be deemed frustrated where either the performance of it is rendered impossible, as inTaylor v Caldwell, or where a subsequent event would frustrate the core purpose of the contract, as in Krell v Henry. The Law Reform (Frustrated Contracts) Act 1943 improved the common law position of recovery, where parties had exchanged deposits or goods prior to performance; cases such as Chandler v Webster made recovery of pre-payments impossible or difficult, where a contract was deemed frustrated. Frustration cannot in any way be in any way foreseeable or induced by a party it must be the fault of neither party.

Incapacity

Sometimes the capacity of either natural or artificial persons to either enforce contracts, or have contracts enforced against them is restricted. For instance, very small children may not be held to bargains they have made, or errant directors may be prevented from contracting for their company, because they have acted ultra vires (beyond their power). Another example might be people who are mentally incapacitated, either by disability or drunkenness.\ When the law limits or bars a person from engaging in specified activities, any agreements or contracts to do so are either voidable or void for incapacity. The law on capacity can serve either a protective function or can be a way of restraining people who act as agents for others.

Australian contract lawAustralian contract law is based on the inherited English common law regarding contract, with specific statutory modifications of principles in some areas. Australian law has developed through the decisions of Australian courts, especially since the 1980s, and various pieces of legislation passed by the Parliament of Australia and by the various states and territories. See contract law for very general doctrines relating to contract law. In Australia, the law of equity has also played an increasing part in changing the laws regarding contracts, and what occurs when they are breached.

Formation

There are six essential elements necessary for legally binding contract formation: (1) an agreement (offer and acceptance); (2) consideration (generally, the supply of money, property or services however anything will suffice as consideration be it money, or a promise to undertake, or not undertake a particular act); (3) Capacity to enter legal relations. Eg. Of sound mind and legal age (4) Intention by the parties to enter into legal relations (private non-commercial agreements between family members may not necessarily constitute a contract as intention to create legal relations is often not present) and (5) Formalities - In most jurisdictions contracts do not need to be represented in writing however exceptions apply. (6) Certainty.

The foundation of the legal relations called contract is the agreement of the parties. In order for an agreement to be a contract (or a variation to an existing contract) it must be supported by consideration. The agreement must also be sufficiently certain and complete to be enforced in the courts and the parties must have intended their agreement to be a contract. The absence of any of these elements will signify either that there is in law no agreement or that the agreement is not enforceable as a contract.

Agreement

The existence of an agreement between the parties is usually analysed through the rules of offer and acceptance This may be expressed as a clear indication ("offer") by one party (the "offeror") of a willingness to be bound on certain terms accompanied by a communication by the other party (the "offeree") to the offeror of an unqualified assent to that offer ("acceptance").

An offer indicates an intention by the offeror to be bound without further discussion or negotiation, on acceptance of the terms set out. It's distinguished from an "invitation to treat", which is a request to others to make offers to engage in negotiations with a contract in mind. An offer may be made to become liable to anyone who, before it is withdrawn, accepts the offer. It may be restricted to certain classes of people; or on the other hand be made to anyone who, before it is withdrawn, accepts the offer, including unascertained persons, or to the public at large. However, an offer is ineffective until it has been communicated, either by the offeror or a third person acting with the offeror's authority.

An acceptance of the offer resulting in a binding contract must take place with knowledge of the offer and an intention to accept the offer. Although acceptance need not be express and may be implied from conduct, it must correspond with the offer; be unequivocal; and in general, be communicated to the offeror. Where a purported acceptance proposes one or more additional or different terms it is ineffective as an acceptance, unless the variation is solely in favour of the offeror. A purported acceptance will also be ineffective if made at a time when the offer has lapsed by virtue of time; if it is made subject to a contingency and that contingency ceases to exist; if the offeror dies and the offeree has notice of this fact; by the revocation of the offeror or the rejection by the offeree.

It should be noted, however, that the rules of offer and acceprance are merely "an aid to analysis", and may sometimes prove inconclusive or artificial. A contract can be made without an identifiable offer and acceptance, provided the parties have manifested their mutual assent. The "acid test" in a case where offer and acceptance cannot be identified, according to Justice Cooke in Meates v Attorney-General, "is whether, viewed as a whole and objectively from the point of view of reasonable persons on both sides, the dealings show a concluded bargain."

Consideration

The second element necessary for contract formation is consideration. A promise will be enforceable at common law only if it is supported by consideration or made under seal. Consideration can be anything from money to a promise to undertake or not undertake a particular act, even a mere peppercorn could suffice.

"Consideration" in this context means that a promise is given in return for a promise received. The usage of the word derives from expressions such as: "I will give you ten pounds in consideration of the apples you are delivering to me."

Capacity

Contractual capacity refers to the ability of a party to enter into a legally binding contract. Minors, drunks and the insane may not possess adequate capacity however the ordinary reasonably person is presumed by default to have contractual capacity.

Intention

The third element is that the parties must manifest an intention to create legal relations. The intention requirement has often been approached on the basis that parties to commercial arrangements are presumed to intend legal consequences, while parties to social or domestic agreements are presumed not to intend legal consequences. Such presumptions determine who bears the onus of proof.

Formalities

In most jurisdictions contracts do not need to be represented in writing but exceptions apply. Oral contract are as enforceable as written contracts. However, there are a number of exceptions that have been created by statute. Examples are marine insurance which to be binding must be documented in written form. Also consumer credit must be documented in written form with a copy provided to the consumer. These requirements have been put in place by statute in order to protect consumers and/or prevent such acts as fraud.

Certainty

For contract formation the agreement must be sufficiently certain and sufficiently complete that the parties' rights and obligations can be identified and enforced. The topic of certainty encompasses three related and often overlapping problems:

1. The agreement may be incomplete because the parties have failed to reach agreement on all of the essential elements or have decided that an essential matter should be determined by future agreement.2. The agreement may be uncertain because the terms are too vague or ambiguous for a meaning to be attributed by a court.3. A particular promise may be illusory because the contract effectively gives the promisor an unfettered discretion as to whether to perform the promise.

The case law reflect the tension between, on the one hand, the desire to hold parties to their bargains in accordance with the principle pacta sunta servanda and, on the other hand, the courts' reluctance to make a bargain for the parties. Although there have been differences in Australian judicial opinion as to the role of the court in giving effect to a contract, in general the courts give primacy to the need to uphold agreements, particularly executed agreementsand commercial arrangements.

Terms

A "term" is any clause or provision in a contract. The two main issues which arise in relation to contractual terms are: what are the terms of the contract (identification) and what are their legal effects (construction).

Apart from the terms expressly agreed, by reason of what the parties have written or said, implied terms may also exist, to impose obligations on either or both of the parties or to qualify the terms of their bargain. Although some statements made before the contract was entered into may be intended to operate as terms, not all such statements operate as terms.

Illegality

A contract may be illegal because it is prohibited by statute or because it infringes a rule of public policy.

Australian legislation affecting contracts

Most States have effected statutes relating to the sale of goods, such as the Sale of Goods Act 1896 (Qld), which imply conditions and warranties in relation to fitness and merchantibility. However, in many instances such implied terms can be displaced by the contrary intention appearing in the contract between the parties. This has meant that, in practice, in many sale of goods contracts these provisions are displaced.

There are similar implied terms under the Trade Practices Act relating to fitness and duty to take reasonable care in some classes of contract, and these particular terms are unable to be displaced by contrary intention: that is, the term will be implied into a contract of that kind irrespective of the parties' intention.

The Trade Practices Act, together with Fair Trading legislation in all states, also allows a corporation or person to be sued where they have engaged in misleading or deceptive conduct regarding commercial or trade matters.

Australian case law

A number of decisions from Australian courts have also affected the circumstances where legal action can be taken regarding contracts.

A number of Australian cases have introduced the concept of acting "unconscionably" as a reason for overturning the validity of a contract: Commonwealth v Verwayen, or where one party is at a "special disadvantage": Commercial Bank of Australia Ltd v Amadio.