Contract Law: Elements and specific terms in Business contracts

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Common Law

Contract Law: Elements and specific terms in Business contracts.

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Tort Law: Law of tort in Business activities; Elements of the tort of negligence.

Executive Summary

To whom this may concern

This work contains two of the most important components of common law: the law of contract and the law of torts. Using a series of questions, the writer is able to explain the meaning of as well as the application of these two important branches of law. Proper examples as well as cases have been used to add weight to the explanations.

The essay begins with definitions of the essential elements of valid and legally binding contracts after which the role of the contract in the business context is highlighted. Using a company called Ethames Educational Services plc, the writer applies common law knowledge to demonstrate how important contractual terms apply in real life situations, these terms include: the rule on “offer and Acceptance” and its practical implications in the formation of contracts, the presumptions of the law on “intention to create legal relations” and the importance of “consideration” for the validity of contracts as well as an explanation of the legal position in relation to the “capacity of the parties to enter into the contracts.”

The writer next identifies specific terms of a business contract and analyses the legal implications of a breach of specific terms of a contract. The terms discussed are: Conditions, Warranties and an Innominate (intermediate) terms. Examples are given with relation to Ethames’ specific terms in its agreements with the suppliers and customers to ensure effectiveness and efficiency in the company’s operations. Finally on contract law the writer discusses incorporation of exclusion and limiting clauses in the company’s contracts and the legal effect of these clauses.

After contract law the writer examines the role of the Law of Torts in business activities. A contrast between tortuous and contractual liabilities is given. A discussion on liability, as an occupier of premises, in tort, liability of the company as an employer as well as the doctrine of vicarious is done.
Finally the writer seeks to understand and apply the elements of the Tort of Negligence by establishing how a claim in negligence can be proved. The writer completes the paper through analysing a short illustrative case advising the company on the possible legal liability in respect of the mishap that happens to one of its security guards who gets hurt in the course of duty.


Executive Summary

1.      Introduction                                                                                                                 5

2.      Task1-Essential Elements of a Valid Contract                                                                      5

a.       Different types of business contracts                                                                5

b.      The rule on “offer and Acceptance”

c.       the law on “intention to create legal relations”                                                  6

the legal position in relation to the capacity of

the parties to enter into the contracts

d.      The legal position in relation to the capacity

of the parties to enter into the contracts                                                              7

3.      Task 2 – Specific Terms in a Business Contract                                                       8

a.       Terms of a business contract, implications of

a breach of specific terms of a contract                                                             8

b.      Condition, a Warranty and an Innominate term                                                8

c.       Exclusion and limiting clauses                                                                           8

4.      Task 3 – Law of Tort in Business Activities and

Forms of Tortuous Liability                                                                                        9

a.       Tortuous liabilities Vs. contractual liabilities                                                     9

b.      Liability as an occupier of premises, in tort                                                       10

c.       The doctrine of vicarious liability                                                                                  10

d.      Strict liability Vs. Tortuous liability to employees                                             11

5.      Task 4 – Elements of the Tort of Negligence                                                             12

a.       Proof of claim in negligence against a company                                                12

b.      Mishap case                                                                                                        13

6.      Conclusion                                                                                                                    13

7.      References                                                                                                                    14


This essay demonstrates an understanding of contract and tort law by highlighting essential elements of a valid and legally binding contract and its role in a business context. It explores the significance of specific terms in a business contract, examines the role of the Law of Tort in business activities assessing particular forms of tortuous liability and makes an application of the elements of the Tort to Negligence.

Task 1 – Essential Elements of a Valid Contract
1a) Explain the different types of business contracts that Ethames Educational Services plc (the company) can adopt for agreements with the company’s bankers for the mortgage on the office property; IT & other suppliers and the customers; and discuss the essential elements of these contracts. (LO1)

A contract is a deal between two or more parties, in relation to a particular subject. These parties come to an agreement to exchange some form of value or consideration. For a contract to be enforceable there must be evidence of offer and acceptance the parties must have the capacity to transact, as well the ability to perform or deliver. The contract must be done in good faith and there should be no violation of public policy. All contacts contain the above fundamental elements regardless of the subject matter to be agreed upon
Different subjects call for different types of contracts. In the case of Ethames Educational services the contents of the different contracts it will write will depend on the type of transactions the company is getting into. For the mortgage contract, apart from having the basic features of a contract it must have additional terms specific to banking transactions. It will point out things like principle, interest rate, term of the mortgage, and collateral.
A contract with suppliers will contain specific terms such as terms of payment such as cash and credit, discounts, and so on. A contract with customers will have additional specific terms touching on product description, if it is illegal to sell to a certain group of people for example cigarettes and liquor to under aged ones.
1b) Discuss the rule on “offer and Acceptance” and their practical implications in the formation of the contracts identified in task 1a. (LO1)

An offer is a statement of willingness by one party to enter into a contract on a particular set of terms, with the intention of being bound as soon as the party to whom the promise is made (the offeree) signifies his acceptance. The offer must be full, complete, specific and capable of being accepted. It must include the fundamental terms of the agreement with the intention that no further negotiations are to take place.

Acceptance is the process through which the offeree communicates that he has no problem with the terms of the offer and will go ahead with the transaction. Acceptance does not take place until it is communicated to the person making the offer. Communication of acceptance is the moment when the contract is formed. When communicating acceptance the Reception Rule comes into play through two ways: first; instant forms of communication such as phone calls and the contract is formed when acceptance is received by the person making the offer. Secondly; for acceptance conveyed through post, the contract is formed as soon as the letter of acceptance is posted and remains effective even if the letter is then lost, delayed or destroyed.

1c) Analyse the presumptions of the law on “intention to create legal relations” and the importance of consideration for the validity of the different types of contracts identified in task 1a (mortgage lenders, suppliers, and customers). (LO1)

If the parties make an agreement without any intention of being legally bound then that agreement will not be regarded by the courts as a contract. In commercial agreements there is a presumption that the parties intend the agreement to be legally binding. To rebut this presumption a party will have to produce clear evidence to that effect. Examples of situations where courts have held that there was no intention to create legal relations are advertisements (in which vague and exaggerated claims are often made in order to attract custom), domestic agreements between husbands and wives or parents and children and social agreements (such as an invitation for dinner). There may of course be certain circumstances in which advertisements, domestic agreements and social agreements could be regarded as legally binding – one example of this would be where members of the same family have a business relationship with one another. (Contracts par4)

If supplier A. formally offered to sell computers to Ethames but due to one reason or another Ethames failed to respond to the that note and then A took Ethames to court for breach of contract A would not succeed because there was no “meeting of the minds” between them and Ethames did not show any intention to create legal relations.

Work in progress is proof of intention to create legal relations. If Ethames enrolled students for classes and then in the middle of the semester stopped offering educational services, the students can take Ethames to court and succeed in getting refunds. If the Ethames wrote to the bank asking about the terms of the mortgage, just enquiring about mortgage is not and expression of intention to create legal relations.

Consideration means the mutual exchange of something of value. For a contract to be valid the parties must exchange something of value. Ethane agrees with students to get money in the form of fees in exchange of educational services. Knowledge is of value to students. In the mortgage contract between Ethane and the Bank, the Bank gets money while Ethan gets a house. In the case of a suppliers contract; say supplier A sells a computer worth $2000 to Ethames and Ethames agrees to buy it; then it means that both have considered the value and agree that this is the fair value. If supplier A enters into a contract to sell a computer for $1000, to Ethane and later gets an offer from somebody else for $2,000, the seller can’t revoke the contract on the basis that the computer was worth a lot more than he bargained to receive. Supplier A will have to live with the consequences of a bad negotiation.

1d) Explain the legal position in relation to the capacity of the parties to enter into the contracts identified in task 1a. (LO1)

Contractual Capacity is the minimum mental capacity required by law for a party who enters into a contractual agreement to be bound by it.  Common law recognizes three classes of persons who are generally not considered to have sufficient capacity to be bound by their contracts. These are: Minors or unmarried persons under the age of eighteen, Mentally Impaired or mad people and mentally Incompetent Persons-those who, at the time of contracting, intoxicated voluntarily or not.

If Ethane entered a contract to buy a house from a minor, then this contract is voidable by the minor. Similarly it is illegal for Ethane enters into and agreement to sell cigarettes or alcohol to minors. If Ethane enters into a contract wit another party who later breaches the contract, if it can be proved by a medical doctor that the party was mad, then Ethane has no case.

Task 2 – Specific Terms in a Business Contract
2a) Identify two specific terms of a business contract and analyse the legal implications of a breach of specific terms of a contract. (LO2)

Specific terms define how a contracted is to be implemented. Two common specific terms are conditions and innominate terms. A contract contains many terms. However some terms are more important than others. Terms that are of crucial importance to the contract are normally classified as conditions, whereas less important terms are referred to as warranties.(Rush & Ottley pg 71)These are terms that are difficult to determine whether they are conditions or warranties because whether they are classified as a warranty or condition depends on the nature of the breach.

2b) Explain how the company can employ a Condition, a Warranty and an Innominate (intermediate) term as specific terms in its agreements with the suppliers and customers to ensure effectiveness and efficiency in the company’s operations. (LO2)

In its contract with students, Ethames would have terms that are important and others whose breach would not make the contract void. The amount of fees per unit of study is a condition because without it there would be no consideration. If a student failed to pay fees then he would not be allowed to enjoy Ethames’ services. On the other hand a clause on tardiness or dress code may not jeopardize the execution of the contract.

Once upon a tine a university stated a program meant to encourage fat students to reduce weight. It stated that if fat students reduced weigh by a certain number of pounds they would be allowed to take a certain class. Student A really wanted to join that class but she was denied entry after being given a couple of chances by the university to reduce weight. She protested and in the course of events got expelled from the university. She sued and won the case and even got the coveted class. The university at first took the ‘weight reduction clause’ for a condition but the court later translated it as a warranty.

2c) Discuss how the company can incorporate exclusion and limiting clauses in the company’s contracts and the legal effect of these clauses. (LO2)

Exclusion and limiting clauses are terms introduced in the contract that exclude or limit liability on one party. A typical example is the bus ticket referring to the appropriate conditions of transport. (Lawson 2005). For a court of law to accept such clauses it must be satisfied that ‘the particular document relied on as containing notice of the excluding term is in truth an integral part of the contract and not for example in the nature of mere receipts that really represents an acknowledgement of a contract, rather than operate as a part of one.

            Just to appreciate how much such clauses can save companies here are a few: “parking is at owner’s risk”, “trading conditions, see reverse,” “the company is not responsible for damage caused by fire to customer’s cars on the premises.” In the event the actual liability occurs, then this clause can save the company a lot of money which it would have paid in the form of damages for example in the case of Rutter v Palmer.

The owner of the motor car deposited it for sale on commission with the owner of a garage upon the terms of a document containing the condition: “Customers’ cars are driven by our staff at customers’ sole risk.” The car was sent out by the owner of a garage in charge of one of his drivers to be shown to a prospective customer. The car was damaged owing to the negligence of the driver. The court of appeal found the exclusion clause effective and the garage owner did not pay any damages. (Lawson pg 56)

For example, in the contract between Ethames and students Ethames could incorporate a clause that “students are responsible for their personal insurance.” This would exempt the company from shouldering hospital costs incase of such happening to students in the company’s premises.

Task 3 – Law of Tort in Business Activities and Forms of Tortuous Liability
3a) Explain how the tortuous liabilities of the company differ from its contractual liabilities, in general. (LO3)

As Akula puts it, if contract law is the law of deals then Tort law is the law of duties. The word tort means ‘wrong’ in French. This branch of law is concerned with civil wrongdoings and is different from criminal and contractual law. People and companies (who are legal entities) have interests which others have the duty to respect them. Failure to respect these rights the offender is liable to pay damages. These rights are independent of contractual agreements. Tort law protects slander, defamation, product liability, accidents and false imprisonment. (Akula pg3)

Contractual liabilities are encapsulated in the terms of the contract; in contrast liabilities in tort are outside the contract. A company can sue for invasion on privacy, one of its employees can sue the company of emotional distress and negligence, the company can stop employees from unfairly competing with it and so on, matters which are not covered in any contract.

It is therefore clear that a number of sue able injuries caused by parties in a contractual relationship may still be tort rather than contract claims, such as breach of duties.

3b) Discuss the liability of the company, as an occupier of premises, in tort. (LO3)

The Occupiers’ Liability Act, 1995 which replaced the common law rules on the subject divides entrants into three categories: visitors, recreational users and trespassers. As far as the law is concerned the term ‘visitors’ includes all those enter another’s property either with that other’s consent or by authority of the law. A fire fighter for example can crash into burning premises without permission. (Binchy pg32)

When it comes to an occupier of premises’ liability the law states that the company has to exercise duty of care towards visitors. If the occupier does not they will be found guilty of negligence. This is because for one to be treated as a visitor, they will have paid for entry, in exchange of the value they will derive from the premises. This is as good as ‘consideration’ and regarded by law as though they have entered into a contract with the occupier.

In contrast recreational users are classified as those, who though permitted entry, do not pay for any charges, and conduct their activities in the open air including sporting activity, or visit caves, rocks and other areas in the premises for scientific research. The company has no liability towards those in this category though he is not supposed to injure them or damage their property in any way. The same applies to a trespasser. The occupier though is allowed to intentionally injure a criminal trespasser where this is required for self-defense, defense of others or defense of the property (Binchy pg39)

3c) Analyse the liability of the company as an employer and the effect of the doctrine of vicarious liability in relation to health and safety protection of the employees. (LO3)
The company as an employer has a duty to uphold the health and safety of its employees. They have a right to health and safety. According to tort law, fault would be found if the company became negligent by breach of duty to care. Therefore if the company premises has a slippery floor and a staff member falls and hurts herself, the company has duty of care to pay hospital duties because it neglected working on the slippery floor which is a hazard.

            The doctrine of vicarious liability holds that a person or company can be held liable for the tortuous conduct of another person. Under the doctrine of vicarious liability, the law literally tells the corporation ‘you bear the responsibility for the injury caused by the negligence of your employee because you have the power to sack him and hence reduce the possibility of such injury occurring again.’ For example BP is paying for the oil spill disaster in the Gulf of Mexico, banks pay account holders for loses caused by the negligence of the bank’s cashiers.

3d) Distinguish the strict liability of the company from the company’s general tortuous liability to its employees. (LO3)

If a company is faulted for negligence with respect to any of the areas covered by tort law then it pays for damages. However a company can find itself liable even when it has exercised duty of care. When this happens, it is called strict liability. This commonly happens with product liability. Whereby the company can be held liable ‘for certain kinds of harm that is caused by its conduct without a showing that it was at fault in either of the traditional senses; even if it did not intend the harm, and took all reasonable precautions to prevent it; it is nevertheless held responsible in tort and must pay tort-like damages to whomever was harmed.’(Akula pg8)

For example, a manufacturer bound by strict liability principles is responsible for harm caused by a product the injury was due to a defect in the product. The policy justifications offered for strict liability in the consumer products area include the themes most often found in strict liability proposals generally: that strict liability avoids the difficulties of proving fault; that it can be designed to put legal responsibility where it will provide the most effective incentives to avoid future harm; and that it can function as a form of social insurance by placing the costs of harm on a party. For example now that Toyota has been withdrawing some its vehicles from the market due to technical defects, it should be liable to pay damages if a motorist got injured on one of its defective vehicles.

            However strict liability does not mean that the manufacturer has to be liable for all injuries as shown in the Rodgers v. Adams Childrens Wear Ltd. case.

A six year old girl was burnt when wearing a dress manufactured by the defendant. There was a warning on the label sewn into the side seam. Her claim for negligence failed. Carroll J. held that there had been no obligation to test the dress for inflammability. The relevant regulations extended only to children’s nightdresses and dressing gowns. Nor had the manufacturer been negligent in failing to place the warning at the neck or on a hanging tag. No regulation addressed the question of location of warnings. The learned judge held that there had been no breach of the European Communities (General Product Safety) Regulations, 1997. Regulation 8 deemed a product safe if it conformed to specific rules of law of the state drawn up in conformity with the Treaty of Rome. Where no such rules existed, the conformity of a product to the general safety requirements should be assessed taking into account standards drawn up in the State, codes of good practice in respect of health and safety in the product sector concerned or the state of the art and technology and the safety which consumers might reasonably expect. Accordingly, Carroll J. concluded that the dress was a safe product. (Binchy pg46)

Task 4 – Elements of the Tort of Negligence
4a) Explain how any claim in negligence against the company can be proved. (LO4)

For any one to succeed in launching a claim in negligence against the company and actually get the court to order the company to pay damages, it is required under tort law that the court finds fault. It has to be established that the company failed to fulfill a duty of known as standard of care owed to the claimant. This is important because not every unfortunate accident or event that leads to any sort of injury is taken as a fault. For example if a doctor exercised due care in a medical procedure but unfortunately the patient dies, he will not be guilty of any thing.

To prove that the company is liable under tort law principles, it must fail to fulfill a duty owed to the claimant. The most common standard of care is the called the ‘reasonable person’ standard which according to Akula “is the general duty to take reasonable precautions to protect the interests of others from harm including the costs of the precautions, and the social utility of the conduct at issue.” Negligence is the most common basis of tort liability and the law finds considers negligence a form of fault. (Akula pg11)

4b) The claimant was a security officer of the company. He was among others called to the scene of an accident where a student was trapped in the lift; a heavy jack was needed to rescue the student. The jack was not designed to carry out that type of operation; the claimant was injured when the jack slipped. He sued the company.
Advise the company on the possible legal liability in respect of the mishap. (LO4)

By determining who bears legal responsibility for the injury the following factors determine whether or not, the security officer is entitled to financial compensation for damages: first, the accident was caused by a dangerous poorly maintained lift. If Ethames owns the property or it is responsible for its maintenance, then it failed in showing duty of care by not repairing the lift. This is sufficient proof of fault. Secondly, the manufacturers of the defective lift are also liable under strict liability. It can be proved that they produced a defective lift. Finally the security officer was on duty, and as part of his duties he was required to look after the safety of all in the premises. So he was at the right place at the right time. The fact that the jack was not designed to carry out that type of operation and that the security officer is not a trained mechanic may work against the total claim because the court may find that he was partly negligent for doing things that were outside the scope of his duties.


For a contract to be enforceable, it must contain basic elements such as: Agreement, Consideration, Offer and Acceptance, and Capacity. It must be done in Good Faith and there should be No Violation of Public Policy. Specific Terms in a contract include Conditions, Warranties and Innominate terms. It is important to incorporate exclusion and limiting clauses in a contract depending on the nature of work the parties will engage in. Breach of contract can lead to legal prosecution and payment of damages. There are a number of contractual liabilities that are actionable under the law of torts. Tort law deals with civil wrong doing. Possible torts that a company may commit include: vicarious liability, occupier of premises and strict liability. For a court of law to find fault under the law of torts, it must be established that it was as a consequence of the negligent conduct of the accused that injury came upon the claimant.


Larson, A. (2003). Contract Law – An Introduction [Online], Available:, [Accessed 14 July 2010]

Akula, J.L. (1999). Tort Law in a Peanut. Rev. 3/7/99, [Online], Available:, [Accessed 15 July 2010]

Binchy, W. ‘Recent Developments in the Law of Torts’ Judicial Studies Institute Journal [4:1 Ottley, J., Rush, M. (2006) Business Law, Thomson, London, England.

“Contracts: Basic Legal Issues.” Business Information Services; Cleaver Fulton Rankin Solicitors, [Online], Available: , [Accessed 15 July 2010]

Lawson, R. (2005) Clauses and Unfair Contract Terms, 8th Edn. Thomson, Sweet & Maxwell Ltd, Avenue Road, London, England.


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