02 LAW OF CONTRACT

Topic 2: Law of Contract Law 416: Business Law

Table of Contents

  • What is contract? 01

  • Offer/Proposal

  • Acceptance

  • Consideration

  • Intention to create legal relation

  • Certainty

  • Capacity

  • Free consent

  • Elements of contracts: formation 02

  • Discharge of contract/ termination of contract 03

  • Remedies of Contract 04

What is a Contract?

  • Defined by Section 2(h) of the Contract Act:

    • A contract is an agreement enforceable by law.

    • Legally binding between the parties.

    • Parties can enforce their rights under the contract.

Contract vs. Agreement

  • Contracts involve an element of agreement, but not every agreement results in a legally enforceable contract.

    • All contracts are agreements, but not all agreements are contracts.

Elements of a Contract

For an agreement to become a contract, the following elements must be fulfilled:

  1. Offer/Proposal

  2. Acceptance

  3. Consideration

  4. Intention to create legal relations

  5. Certainty

  6. Legal capacity

  7. Free consent

Offer/Proposal

Definition of Proposal/Offer

  • Section 2(a) of the Contract Act: A proposal is made when one signifies to another his willingness to do or abstain from doing something with the intention of obtaining assent.

  • The one making the offer is referred to as the promisor/proposer/offeror, while the one accepting the offer is the acceptor/promisee/offeree.

Invitation to Treat (ITT)

  • Distinction between an ITT and a proposal:

    • An ITT is not an offer but a preliminary communication between parties.

    • Example: Gibson v Manchester City Council (invitation to treat does not constitute a proposal).

Examples of ITT

  • Advertisements

  • Price tags in supermarkets

  • Price lists

  • Auction invitations

  • Restaurant menus

    • In a restaurant, ordering from the menu constitutes an offer when the customer places an order.

Legal Aspect of Advertisements

  • General Rule: An advertisement is an ITT, not an offer (e.g. Harris v Nickerson).

    • Exception: Mrs Carlill v Carbolic Smoke Ball Co. (advertisement indicated intention to be bound).

Display of Goods in Supermarkets

  • Display does not amount to an offer; it is an ITT.

    • Customers make offers by selecting goods; acceptance occurs at the point of sale.

  • Case: Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd (goods displayed on shelves are ITT, acceptance occurs when the cashier accepts the customer's offer).

Communication of Proposal

  • A proposal must be communicated to the acceptor for acceptance.

  • Communication is complete when it comes to the knowledge of the person.

  • If the acceptor is unaware of the proposal, no contract exists.

  • Case: Regina v Clarke (Ignorance of an offer correlates to non-acceptance).

Acceptance

Definition of Acceptance

  • Section 2(b) of the Contract Act:

    • Acceptance occurs when the person to whom the proposal is made signifies his assent.

    • Must be communicated to the proposer to form a binding contract.

Elements of Acceptance

  1. Acceptance must reflect the exact terms of the offer (no modifications).

  2. Acceptance must be absolute and unqualified (Sec 7a).

  3. Must be communicated within a reasonable time.

Silence is Not Acceptance

  • Silence cannot be construed as acceptance; there must be positive conduct signifying acceptance.

  • Case: Felthouse v Bindley (acceptance must be communicated).

Exceptions Where Acceptance Need Not Be Communicated

  1. Mutual promises.

  2. Acceptance through post (Postal Rule).

  3. Offer to the public (performance suffices).

Acceptance Through Post

  • The communication of acceptance is complete when posted (S.4(2)(a)).

  • Proposer is bound once the acceptance is dispatched regardless of its actual receipt (Entores case).

Revocation of Offer/Proposal

Revocation Before Acceptance

  • A proposal can be revoked at any time before acceptance is complete.

  • Revocation methods include: a) Notice of revocation. b) Lapsing of time. c) Failure to fulfill a condition precedent. d) Death or mental disorder of the proposer.

Consideration

Definition of Consideration

  • Consideration is the price paid by each party for the promise of the other.

  • Agreements without valid consideration are void.

  • Section 2(d): Any act or abstinence constitutes consideration.

Elements of Consideration

  1. Need not be adequate (as seen in Swee Kim v Beh I Hock).

  2. Past consideration is valid (Kepong Prospecting Ltd v Schmidt).

Exceptions to the Requirement of Consideration

  1. Contracts related to natural love and affection.

  2. Agreements to compensate for past voluntary acts.

  3. Agreements compensating legally compelled acts.

  4. Agreements to pay statute-barred debts.

Intention to Create Legal Relations

Importance of Intention

  • An agreement alone doesn’t create a binding contract; intent is necessary.

  • Business agreements presume intent to create legal relations; domestic agreements generally do not.

Certainty of Contract

Requirement of Certainty

  • Contract terms must be clear and precise; vague agreements are void (S.30 of Contract Act).

  • Melodramatic agreements held void if terms are uncertain (Karuppan Chetty v Suah Thian).

Legal Capacity

Competency to Contract

  • Every person is competent to contract if they are of the age of majority (18 years) and of sound mind.

  • Exceptions exist for minors under specific circumstances (necessaries, beneficial contracts, and scholarships).

Free Consent

Definition of Consent

  • Section 13: Consent means agreeing upon the same thing in the same sense.

  • Consent is considered free unless influenced by:

    1. Coercion

    2. Undue influence

    3. Fraud

    4. Misrepresentation

    5. Mistake

Coercion

  • Coercion involves forced consent and is defined as doing or threatening unlawful acts.

Undue Influence

  • Occurs when one party exploits their position to dominate the will of the other.

Mistake

  • Mistakes regarding essential facts can void the contract (Section 21).

Misrepresentation

  • Misrepresentation refers to false statements inducing agreements; may be innocent or fraudulent.

Discharge of Contract

Means of Discharge

  1. By performance

  2. By agreement

  3. By frustration

  4. Breach of contract

Remedies for Breach of Contract

  1. Damages

    • Meant to compensate for losses due to breach.

    • Various types: liquidated, unliquidated, pecuniary, and non-pecuniary damages.

  2. Specific Performance

    • Court directs parties to fulfill contractual obligations.

  3. Injunctions

    • Court orders to do or refrain from doing something.