Given that business relationships usually take an impersonal form, they are detailed through agreements that are enforceable by law and whose terms are binding to both parties provided that each has the capacity to enter into such agreement. This is the basis of the law of contracts. In this essay, a number of aspects of contracts are delved into, from the different types that there are, to the validity of contracts, and the formation of contracts.
The Formation of Contracts
Common law requires that the formation of contracts entail the mutual agreement between two parties (or more) who hold the legal capacity to enter into an agreement that is binding in law. Goode et al. (13) therefore points out that contract formation has to include a party (being the offeror) who makes a proposition (being the offer) to another party (being the offeree), who then agrees to such proposition (the agreement to such offer is herein and after referred to as ‘acceptance’). Both parties need have the intention of being bound by the terms set forth in such proposition (hereafter termed “the offer”).
Elements of a Contract
In detailing the formation of contracts, Miller (77) indicates that there are five key elements in the formation of any contract (and for such contract to be deemed legally sound and binding to all parties). The first of these is the explicit presence of an offer, which is made by the offeror to an offeree. The second element is the thinking over of the offer (hereafter termed “the consideration”). The third element is the acceptance of such offer by the offeree, on an “as is” basis upon thinking it over. There, however, is a caveat on the second and third elements. Should the offeree, upon consideration, propose any changes to the offer, the proposed changes then constitute a counter-offer (which then voids the first offer and becomes a new offer in and of itself – and switches the role of the offerer and the offeree). The consideration, Goode et al. (19) interjects, should also be within a reasonable duration time. If the consideration of the offer takes too long a time, the offer may be deemed to have expired and thus no contract is formed thereafter.
McKendrick (25) outlines that the acceptance of the offer, as is, implies that each party has a mutual obligation to live by the term of such offer; this is referred to as the mutuality of obligation and is the fourth element. It is premised on the commitment of either party to the terms set forth in the legally binding agreement that exists between them. Finally, there is the element of competence and capacity to enter into a contract which as McKendrick (28) indicates, is the most important bit as its absence could easily render any contract null and void. In certain circumstances, the formation of contracts requires a written instrument, as Goode et al. (9) notes in order to be considered valid and legally binding.
Validity of Contracts
For contracts to be valid, each of the five (sometimes six) elements set forth here-above need be met. Each party to the contract must be competent enough and possess the capacity to enter into such agreement for the contract to hold. In that regard, persons under the age of majority in the jurisdiction in which the contract is enforceable do not poses the capacity to contract, as do persons whose mental competence cannot be ascertained as at the time of entering into the contract. In certain instances, however, contracts entered into by a minor can be ratified and thereafter deemed legally binding. For instance, if such minor, upon attaining the requisite age of majority, elect to affirm such contract, it becomes immediately legally binding (on the minor and the other party) and thus enforceable. Should the minor choose to not ratify the contract even upon the attainment of the age of majority, and not express any desire to void the contract, it becomes legally binding after a reasonable period of time from the happenstance of such fact (the attainment of majority age by the minor), Dalhuisen (211) writes.
Additionally, each party must enter (and be shown to have entered) into any contract out of their own free will and of their own volition for the contract to be deemed legal. To that end, not one of the parties should have been under any duress or undue influence at the time of entering the contract. Instances of undue influence or duress may include threats of violence or harm to the party (or to their family or property), misleading information or the misrepresentation of facts (as to the potential benefits to arise from the participation in such contract) which constitutes fraud. Dalhuisen (226) notes that the contract also needs to be legal and to set out to meet a legal end. Its consideration should be lawful and should include the use of legal objects only. Should the contract set out to meet illegal ends or its consideration involve illegal objects, such contract can be deemed to be null and thus voidable by a court of law.
Types of Contracts
There are a number of contract types depending on the nature of their formation. These include written contracts, verbal contracts and standard form contracts.
Written Contracts
An agreement, legally binding, and entered into by competent parties who have the capacity to do so, written contracts have to be documented on paper, and signed as a form of ratification by both the offeror and the offeree. Passera et al. (73) posit that this type of contract is mainly in marital relations, sureties (promise to pay a debt owed to another party), and relations in perpetuity (that continue well after the lifetime of either party to the contract). They are also preferred in the transfer and/or sale of land and the sale of goods of high value. Written contracts are legally binding, provided each and all of the five elements of contract formation is met.
Standard Form Contracts
In civil law, standard form contracts are a type of written contract that involve the setting of the terms of the agreement by one of the parties and the acceptance of such terms, ‘as are’ without countering by the other party (or parties). Essentially, Grzybek et al. (143) notes, standard form contracts are a ‘take-it-or-leave-it’ agreement. Often, this type of contracts is used by large sellers or manufacturers of products to enter into business relations with the buyers. To Bakos et al. (4), this type of contracts reduce the costs of operations for the party drafting it as they involve no negotiations whatsoever; and the terms are detailed in fine print. The possibility exists that they may promote injustice as they are premised upon (and actually exploit) the unequal power relations that subsist between the parties. They are often intended to benefit the party drafting them (the offeror) to the detriment of the one accepting their terms (the offeree). Often in the fine print, these types of contracts Bakos et al. (7) observes are rarely read by the offeree, and in most cases social pressure to sign them may exist – which increases the likelihood of their voidability and nullification by a court of law.
Verbal Contracts
In certain cases, agreements are made by the mere use of speech and no memorialization in writing is required. Verbal contracts, as Passera et al. (87) advances, are therefore agreements that meet each of the five elements of contracts and are intended for the advancement of legal purposes. In many cases, there is written or physical evidence of such oral contract though the parties do not have to necessarily state out the contract in writing. This type of contract may, however, prove undesirable in instances where the parties are required to prove the terms of their agreement, McKendrick (27) adds. They also have considerably shorter limitation periods than written contracts.
Conclusion
The business law exists to not only lay down rules and regulations that determine the conduct of business relationships but also for the peace of mind of parties to such transactions. The law of contracts, as part of the entire body of business law, therefore, outlines the circumstances, requirements and remedies that are applicable in the pursuit of business relations. Some elements of such contract law are as detailed here above.
Works Cited
Bakos, Yannis, Florencia Marotta-Wurgler, and David R. Trossen. "Does anyone read the Fine Print? Consumer Attention to Standard-form Contracts." The Journal of Legal Studies 43.1 (2014): 1-35.
Dalhuisen, Jan. Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law Volume 2: Contract and Movable Property Law. Bloomsbury Publishing, 2013: 204 - 242.
Goode, Roy, Herbert Kronke, and Ewan McKendrick. Transnational Commercial Law: Text, Cases, and Materials. Oxford University Press, 2015: 9 - 21.
Grzybek, Joanna, Tina De Vries, and Yanan Zhang. "Achieving Flexibility in Contracting by using Vague Terms in International Business Contracts: A Comparative Approach from the Perspective of Common law, German, Polish and Chinese Law." Flexibility in Contracting (2015): 143.
McKendrick, Ewan. Contract Law: Text, Cases, and Materials. Oxford, UK: Oxford University Press (UK), 2014: 25 - 67.
Miller, Roger LeRoy. Business Law Today, Standard: Text & Summarized Cases. Nelson Education, 2015: 76 - 127.
Passera, Stefania, Anssi Smedlund, and Marja Liinasuo. "Exploring Contract Visualization: Clarification and Framing Strategies to shape Collaborative Business Relationships." Journal of Strategic Contracting and Negotiation 2.1-2 (2016): 69-100.
