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CONTRACT LAW

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Contract law

Basic principles of contract law

 

A contract is a legally enforceable agreement between two or more parties.  A contractual agreement requires the intention to create legal relations.   The contract is the set of mutual promises (covenants), the promises of one of the party being the consideration for the promises of the other party.  

The  promises made by the parties define the rights and obligations of the parties. The contract allows parties to define their relationship, it is the means of structuring  relationships . The fudamental principe of the binding nature of contracts (pacta sunt servanda) requires that the agreement be made at arm's length

Contract law is sometimes described as a system of private law-making. Contract is the basis for business relationships, it is the means of structuring commercial relationships.  Businesses have a large range of autonomy  in setting the terms of their contracts. Contracts create the private law which will govern the relationship between the parties, they create the individual norms.

The rights and obligations of the parties are determined by the contract's terms to which there has been mutual assent, subject to limits imposed by relevant statutes. 

 Unconscionable  contracts or terms are generally unenforceable.

A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them  (parol evidence rule) .

Contracts  being binding on the parties can be  enforced  by them  in the courts. If one party meets its contractual obligations and the other party doesn't  there is a "breach of the contract" and  the nonbreaching party is entitled to receive relief through the courts.

Generally, the nonbreaching party's remedy for breach of contract is  the money damages that will put the nonbreaching party in the position it would have enjoyed if the contract had been performed. Under special circumstances, a court will order the breaching party to perform its contractual obligations.

ORAL CONTRACT - WRITING

A deal  may be done verbally,  on a handshake  and many contracts do not involve a writing. . Most contracts are enforceable whether they are oral or written.

In business relationships a writing is  not required but is strongly advisable for definiteness  and thoroughness of the terms. Having to set out the terms of the contrat forces the parties to think out the respective obligations and signing the contract underscores the commitment taken.

Concluding the contract on the mere basis of discussions is likely to leave a lot of conditions unresolved . This increases the potential difficulties of agreement a a later date, at a time of difficulties of performance, which will lead to deterioration of the relationship and dispute. In case of a litigation to enforce the contract or sue for damages, a written contract will reduce the  dispute about the contract's terms.

Besides in an oral contact, the parties may have different recollections of what they  finally agreed as a result of the discussions.  .

Some types of contracts must be in writing to be enforced.  State law requirements vary from state to state, but in most states, a contract for the sale of goods for $500 or more must be in writing  (statute of frauds)  .

POWER TO ENTER INTO A CONTRACT

All persons, who are not minors or  mentally incompetent lack, have  the legal capacity to enter into contracts.  In most states, the legal age for entering into contracts is 18. The test for mental capacity is whether the party understood the nature and consequences of the transaction in question.

Corporations have the power to enter into contracts.,  through the acts of their agents, officers, and employees.

The corporation's president can bind the company. The power of a  particular employee of the corporation to enter into a contract is determined by  agency law or corporate law.

 

FORMATION OF THE CONTRACT - OFFER AND ACCEPTANCE

The formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange.

A contract is formed when one party (the "offeror") makes an offer which is accepted by the other party (the "offeree"). 

An offer is a proposal to form a contract . It  can be verbal or in writing . 

An acceptance is  the offeree's assent to the terms of the offer. It can be tacit, by sign or conduct (including performance if inveted by the offer), verbal or in writing. .

No contract is formed until the offeree accepts an offer which is not expressed as "non binding".  Consent is the basis for contractual liability is based on consent.

In general, an offeror is free to revoke the offer at any time before acceptance by the offeree. Until an offer is accepted, the offeror is free - unless it has promised to hold the offer open - to revoke the offer.

An offer which has been terminated cannot be accepted.

Rather than accept the offeree may make a counter-offer and start negotiation.  A counter-offer, like an outright rejection, terminates the offeree's legal power of acceptance.  In complex deals the  negociation is the core of the bargaining which allows the meeting of the minds and the consent of a balanced deal. . During the negociation the parties may sign non binding agreements (Letters of intent, Memorandum of understanding, etc.).

One of the party may use standard conditions in its offer or acceptance  (such as general conditions of sales or of purchase) . This may lead to "battle of form".  Every day contracts are generally adhesion contrats, where there cannot be a modification of the conditions.

CONSIDERATION

"Consideration" is a requirement of contract law. Consideration  is what one party to a contract will get from the other party in return for performing contract obligations. There must be as consideration for both parties ("mutual consideration" ).

Gratuitous promises  , where the promisor does not get any material advantage in consideration for his promose, are said to be "unenforceable for lack of consideration."

In some states, a gratuitous promise can be enforced if the party to whom the promise was made relied on the promise. Other states no longer require consideration for certain types of promises.

In particular because consideration requirements are rather formal , the question of lack of consideration is rarely a  concern in business relationships.  In most business contracts,

The lack of consideration problem can arise in the context of amendments to contracts, however. Also, in some states, a promise to hold an offer open  is unenforceable unless the offeree gives the offeror consideration (pays the offeror money) to keep the offer open.

TYPICAL CONTRACT PROVISIONS

Many contracts include special types of provisions.

Duties and Obligations

The duties and obligations section of a contract is a detailed description of the duties and obligations of the parties and the deadlines for performance.

Representations and Warranties

A warranty is a legal promise that certain facts are true. Typical representations or warranties in contracts concern such matters as ownership of the contract's subject matter (for example, real estate,  , warranties of ownership of intellectual property rights and noninfringement of third parties' intellectual property rights etc.)

For contracts involving the sale of goods, certain warranties are implied under state law unless specifically disclaimed by the parties.

Termination Clauses

These clauses ensure that either or both parties have the right to terminate the contract under certain circumstances. Generally, termination clauses describe breach of contract events that trigger the right to terminate the contract (for example, nonpayment of royalties). Termination clauses also describe the methods of giving notice of exercise of the termination right, and whether the breaching party must be given an opportunity to cure the breach before the other party can terminate the contract.

Remedy Clauses

These clauses state what rights the nonbreaching party has if the other party breaches the contract. In contracts for the sale of goods, remedy clauses are usually designed to limit the seller's liability for damages.

Arbitration Clauses

An arbitration clause states that disputes arising under the contract must be settled through arbitration rather than through court litigation. Such clauses generally include the name of the organization that will conduct the arbitration (the American Arbitration Association, for example), the city in which the arbitration will be held, and the method for selecting arbitrators.

Merger Clauses

Merger clauses state that the written document contains the entire understanding of the parties (Four corner clauses) . The purpose of merger clauses is to ensure that evidence outside the written document will not be admissible in court to contradict or supplement the terms of the written agreement.

TYPES OF CONTRACT

The most common type of contract is the sales contract.  Other frequent contracts are loan contracts, transportation contracts, insurance contracts, etc.

Some contracts are linked to other contracts . This is the case in particular for secured transactions.

LIABILITY IN CONTRACT

 Liability in contract arises in case of breach of performance of the contract. Liability in contract  is based upon the voluntary undertaking of obligations by the individual and differs therefore from liability in torts which is imposed by law and which is based on the activity of individuals.

 

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Some contracts are linked to other contracts . This is the case in particular for secured transactions.

LIABILITY IN CONTRACT

 Liability in contract arises in case of breach of performance of the contract. Liability in contract  is based upon the voluntary undertaking of obligations by the individual and differs therefore from liability in torts which is imposed by law and which is based on the activity of individuals.