In Assignment 1 in Common
Law, the basic notions relevant to business activities will be viewed. The purpose of this assignment is to apply basic theoretical knowledge of common law to day-to-day business practice. In this assignment, particular cases will be considered from a legal standpoint. The legal aspect has always been important to any kind of business.
Depending on the scale of operations we can see legal departments in large multinational corporations or small companies outsourcing lawyers or getting legal consultations.
Knowledge of the law not only allows identifying what’s legal or illegal and not to break the law, but it also helps to secure the company from fraudulent or unlawful actions. Assignment 1 primarily deals with key elements of Contract Law. In the assignment, the main parts of any contract and various types of business contracts will be considered, and such topics as „What makes a valid contract? will be discussed. Rules of offer and acceptance as well as rules of intention and consideration will be viewed in terms of specific situations.
At the same time, the theoretical part of the assignment will be linked to some particular cases in business, and through the synthesis of ideas, the relevant decisions will be made. At the end based on the results of the research and case study I will make conclusions and evaluate my work.
- Task 1. Explain the different types of business agreements that can exist and the importance of key elements in the formation of a valid contract.
With reference to the details for Carlill Vs. Carbolic Smoke Ball Co. case (1893) provided in the learning Centre explains why this case was important in defining the key elements of an “Offer”.
A contract is a legal term for an agreement binding exchange of promises or agreement between parties that the law will enforce. Agreements can be both written and oral. Contract law can be classified as civil in nature or it falls within the civil legal system. (Gahir, 2009)
Business agreements can be subdivided into many different types and categories. The reason for this is simple – most of the business activity needs to be documented, which makes agreement conditions legally-binding and secures the interests of both parties. We can browse the agreements depending on the field in which it is being used:
- Compensation – Employment – Stock Options – Severance
- Finance – Credit – Loans – Warrants
- Business Formation – Bylaws – Incorp. – LLCs
- Intellectual Property Licenses
- Business Planning – Mergers – Spin-offs – Stock Purchase
- Business Operations Real Estate – Sales – Services
- Corporate – Governance – Indemnification – Nondisclosure
- Securities – Shareholder Agreements – Registration Rights (Moodle, 2009)
However, based on Common law lectures (Gahir, 2009) and related resources on Moodle, we can also distinguish the contracts depending on its features and conditions:
- Bilateral Contract – is one of the common contracts. In a bilateral contract, a promise (offer) is made by one party in return for a promise made by another party. The offeror and the offeree make promises, and these promises are the bases of the contract.
- Unilateral Contract – is an agreement in which an offer is made by one party in return for the performance of a specific act by the other party. This means the act should be performed first, and then the contract becomes effective.
- Valid Contract – is a contract containing all the essential elements of any agreement: offer, acceptance, consideration, competent parties, and legal purpose.
- Void Contract – from the technical point of view, a void contract is not a contract at all. It has no legal effect and neither party can enforce the terms in a court of law. The reason is generally the absence of one of the essential components of a valid contract.
- Voidable Contract – a contract that is completely valid and enforceable, unless and until a party legally entitled to avoid the contract decides to do so by claiming some defect in the agreement.
- Unenforceable Contract – an agreement that is legal in all respects but fails to meet some legal requirements. For instance, the law requires that some contracts, such as sales of land, be in writing. If they are not, the contracts are unenforceable, even though they are legal in all other respects.
- Formal Contract – Is a written contract prepared with certain formalities. a)A check b)Real-estate contract
- Informal Contract – Does not require any particular formalities. The parties are free to use any language they chose. It should however contain a few essential elements: the date of the contract, the names and addresses of the parties involved and the signature of the parties.
- 9)Express Contract – A contract in which the agreement is specifically stated. An example of an expressed contract is an insurance policy, in which all the terms of the contract are in writing.
- Implied Contract – A contract in which the parties form a contract from their actions rather than from a specific oral or written agreement.
- Quasi Contract (a contract implied by law) – In certain cases the court will create a quasi contract, in order to promote justice. This insures that regardless of a valid contract the courts will insure that one party will not be unjustly enriched, that is, receive a benefit at the expense of another party.
- Executory Contract – A contract that has not been fully performed by one or all the parties.
- Executed Contract – A contract in which all parties completely carried out their parts of the contract. As it has been previously mentioned, a void contract should consist of the following main components: Parties, Offer, Acceptance, Consideration, Legal purpose
- These components are crucial to any contract. Without even one component the contract becomes void. Let’s view definitions of each component given in an article by Jeffrey Steinberger, a trial attorney (Steinderger, 2007) Offer.
It is a definite promise to be bound on specific terms. These terms should be certain, not vague. An offer can be made to an individual, a group of the world at large. To be certain and clear, an offer must supply information about the purpose of contract, e. g. goods or services. An invitation to treat has to be present in the offer. Termination of the offer is usually in the form of time and date. Another option is a counteroffer, the acceptance of which cancels the original agreement. (Gahir, 2009) Parties. Anyone can enter into a contract, except certain felons and people of unsound mind.
The contract must identify who the parties are; usually, names are sufficient, but sometimes addresses or titles may be used. In sales agreements, for example, in addition to names, “seller” and “buyer” are sometimes used to further describe the parties. Consent (Acceptance). A valid contract also requires the parties’ consent, which must be free, mutual, and communicated to each other. Consent is not free when obtained through duress, menace, fraud, undue influence, or mistake. A person who signs a contract because there’s a gun pointed at his head hasn’t consented to the agreement and can rescind it.
Also, consent isn’t mutual unless the parties agree on the same thing in the same sense. This is often referred to as a “meeting of the minds. ” Generally, there’s an offer and an acceptance communicated by the parties. Object (Legal Purpose). The thing being agreed to is also known as the object or subject. It must be lawful, possible, and definite. A court, for example, will not enforce a contract to perform an illegal act. Consideration. All contracts require consideration, meaning each party must gain something. It may be something that is or isn’t done or given.
When a party agrees to do something or to not do something they must gain something. All these notions have been formed over time and numerous legal procedures. Looking at the case of Carlill Vs. Carbolic Smoke Ball Co. we can see how important the rules of the offer and acceptance are. Carbolic Smoke Ball Co. started an advertising campaign in which the key component has been the promise to give 100 to buyers who followed all the instructions of medical treatment by the carbolic smoke ball ( using it 3 times a day for 2 weeks) and still fell ill during the influenza epidemy.
This case became historical because it had raised a number of fundamental points about the formation of a contract, defined the borders of the notion of ‘offer’, and that it can be made to the world at large. During this campaign, Mrs Carlill did fall ill after the usage of the product, and she wanted to recall promised 100?. However, the company refused to pay money arguing that the terms of the offer have been too vague (no precise date of start and termination) and that there was no proof the woman contracted influenza. The point of these arguments was to make the offer made and the contract void.
During the process the following points have been discussed (Anu College of Law, 1998):
- Was an offer made?
- To whom was the offer made (parties)?
- Communication of acceptance
It was argued that the text of advertising was sales talk and not to be taken seriously. This argument was dismissed as the wording of the advertisement was in very definite language. The company was guaranteeing to pay the money and it had deposited some money at the Alliance bank to show that it was being serious. It was then argued that you cannot make an offer to the world.
Alternatively, the alleged contract was not made with anyone in particular. This argument was not accepted, because this type of offer could be made to the world but then only a limited number of people would accept such an offer by doing what was required in the advertisement. 3)It was then argued that an acceptance of an offer must be communicated. The argument was dismissed because instead performance of the requested act amounts both to accept and to notification of acceptance, that is, the person who offered the reward finds out about acceptance when the claimant arrives to get money. )Another argument that was tried was that the advertisement was too vague. It was said that there were so many possible interpretations of the advertisement that it was too uncertain to constitute a contract. Although there were a number of different meanings that could be placed on the advertisement and whichever meaning was chosen, Mrs Carlill had contracted influenza while using the smoke ball. That was sufficient. 5)After that, it was discussed if Mrs Carlill had provided consideration for the company’s promise. The decision was that she did.
Mrs Carlill’s using the smoke ball was a benefit to the company because it had an interest in people not just buying its product but using it as well. The more use, the more sales. Secondly, it was argued that using the smoke ball was a detriment to Mrs Carlill in the sense that she put herself out by sticking to the regime specified in the advertisement. If we take a look at the elements of the valid offer, we’ll see that they are present. The company had posted the advertising that was actually an offer to the world.
Mrs Carlill accepted the offer by following the instructions for the medication. The case was decided in favor of the plaintiff.
- Task 2: Explain how the onset of new technological advances in IT has altered the rules of Offer and Acceptance in formulating a legally binding agreement, your explanation should refer to a particular example. Technological advances in IT have in many ways simplified the procedure of signing the contract.
Electronic contracts have a lot of advantages, such as reduction of costs related to signing a contract, the ability to sign a contract at any time from any place in the world. With the help of ordinary email, both parties don’t have to meet for signing the contract and spend their time. Access to the internet allows even small businesses to operate on a global scale, not saying about large corporations. However, according to the surveys many people still mistrust electronic contracts and prefer the traditional ways of signing the contract. The reason for this is to do with the basic concepts of any contract: offer and acceptance.
Since the only distinction of electronic contracts is the form in which they are presented, the basic conditions that are necessary to make a valid are the same: offer, parties, object, acceptance, consideration. But the nature of the contract also requires additional conditions, such as non-repudiation (nobody shall change the contents of the contract after it’s signed), valid electronic signatures verified by the third party. This is where the problems with offer and acceptance might arise. Electronic contracts might be fraud because the third party might not be trusted, parties might be not who they claim to be, and the wording might be changed. All these things put in danger the rules of offer and acceptance. One of the parties, in reality, might not have the appropriate legal capacity. According to the Contractual Law, an underage person cannot enter into an agreement, as well as a person who is mentally impaired and incapable of understanding the nature of a contract. A person who is intoxicated to the point that he may not understand the nature and significance of his promise cannot sign a valid contract too.
The above categories of individuals might any contract entered into, which can bring a lot of problems to another party that wasn’t informed of the inability to sign valid contracts. However, when an underage person reaches the age when signing a contract becomes legal, s/he might affirm the contract, as well as if an insane person who recovered from a mental disease or intoxicated person. Another problem with the offer is that there must be a guarantee that both parties sign the same contract. If the wording is changed, the offer might differ from previously discussed.
Having signed such a contract there is no means to make it void because electronic signatures are as valid as real ones. The only way to avoid all the above problems is to use a really good system that secures electronic contracts from fraud and to has trusted third parties who verify electronic signatures. There is another option: to sign a separate written contract assuring that everything will be performed as it is expected. But the most problematic aspect in offer and acceptance within electronic contracts is the communication of acceptance.
One of the parties might receive the contract and not respond (because over the time the situation might change and the contract will become unwanted) pretending the internet or computer stopped working. For example, if we take an electronic real estate contract, the buyer might linger and not sign the electronic contract because s/he is waiting for a better offer from someone else. The solution to this problem is to mention in the body of the contract the period of time until the offer is valid or the conditions under which the acceptance that came late is considered valid or void.
- Task 3: In 2007 Petra, an artist decided to have an extension built onto her house so that she could carry on with her artwork in this space. She agreed to pay Honza 5 000 CZK to produce the architectural plans for the work and to pay Josef 30 000 CZK for carrying out the work.
Petra provided all the materials which she bought from Daniel for an agreed price of 20 000 CZK. After the work was completed Petra discovered that she did not actually have the money to pay the various people concerned. Consequently, she made the following arrangements with all of them: a)She gave Honza one of her paintings instead of payment. )When she failed to pay Josef, he threatened to sue her, until her friend Ondrej offered to pay him half of the amount of 15 000 CZK if he withdrew his court action, which he did. c)She told Daniel that he would have to accept 15 000 CZK as she could not afford to pay him any more money and he reluctantly agreed to accept it in full and final payment for her debt. Three months later Petra inherited 200 000 CZK. Advise the parties on whether Petra can be made to pay her original debt. Let’s look at the situation from the point of view of business law.
The parties are Honza, Josef, Daniel, and Petra (the contract was done with each of them individually). The offer is to provide plans, materials, and carry out works. The object of the contracts is lawful. Petra accepts these offers. Her consideration is to pay a specified amount of money after the works are done. This means, both parties have agreed and the first contract has been made. When Petra discovered she didn’t have money, she made a counteroffer individually to each of the parties. This had canceled the initial agreement and having accepted the money Petra gave, Honza, Josef, and Daniel made the second contract, gave their agreement, and cannot recall money specified in the initial contract. However, another point that should be discussed is when Petra discovered she doesn’t have money. If Petra found that out before the end of the contract, she could revoke the offer. That would be legal for both parties. If she discovered she doesn’t have after the end of the contract, then the original contract could have been considered to be unenforceable, because the consideration (in this case the payment) hasn’t been satisfied.
At that point, Honza, Josef, and Daniel could sue Petra and somehow get their money. The previous two paragraphs are closely connected to the rules of intention and consideration. Having decided to make a contract with builders and suppliers, Petra showed her intention to enter into a binding contract. So did the workers. The intention is also important because if Petra intended to enter into legal relationships, she should have been aware of the consideration part as well, i. e. she should have had at her disposal sufficient funds. Consideration has been detailed in the contract.
After Petra hadn’t satisfied the consideration, the rules on intention and consideration for the first contract have been broken. When Petra has proposed painting and partial payment instead of initial payment, she made a counteroffer. Therefore, the second contract between the parties should have been made. It is not detailed in the case if there was a new contract, but still, both parties have accepted the conditions and by taking the painting and partial payment the builders have accepted Petra’s consideration, which made the contract valid.
At this point, Petra cannot be made to pay her original debt. Here it’s important to know if when making the second contract it was mentioned that it was Petra’s friend who paid one of her debtors (Josef) threatening to sue her. If this detail is not specified in the second contract than legally Josef still has the right to sue Petra and make her pay the money.
Legal aspects have always been important in successful business management. However, sometimes it is extremely difficult to apply the law to some situations in real life.
The only way to do this is to study particular cases that are common in business and generate experience. In the assignment the cases of Carlill Vs. Carbolic Smoke Ball and Petra have been discussed. In each case, the basic elements of a valid contract have been considered. The case of Carlill Vs. Carbolic Smoke Ball helped me to understand how the contract law evolved and why the contracts should have the following basic elements: parties, object, offer, acceptance, and consideration.
The case of Petra was especially useful in terms of looking at how the rules of offer and acceptance function in typical business situations. The most challenging part of this assignment has turned out to be the decision on Petra’s case. This showed me how even one simple and common situation can cause a lot of controversies and troubles in legal terms. I suppose that my point of view might not mention or explain many legal factors involved in the case. From the case it can be concluded that the knowledge of Contract law is essential no matter what kind of business you run, be it art studio or building.
- Gahir, B 2009, class notes
- Gahir, B 2009, Assignment 1- Understanding the essential elements of a valid and legally binding contract, viewed 05 Oct 09.
- Prague College, Moodle 2009, Types of business contracts, viewed 08 Oct 09.
- Entrepreneur. com 2007, Jeffrey Steinberger – Is this contract legal? viewed 10 Oct 09.
- Anu College of Law 1998, Contract Formation – Offer and Acceptance. Viewed 10 Oct 09, http://law.anu.edu.au/colin/Lectures/Off_Acc.htm.
Cite this Understanding the Essential Elements of a Valid and Legally Binding Contract
Understanding the Essential Elements of a Valid and Legally Binding Contract. (2018, Jan 31). Retrieved from https://graduateway.com/understanding-the-essential-elements-of-a-valid-and-legally-binding-contract/