HEXCO · Polytechnic · NC Accountancy

Business Law 1: The Law of Contract

Learning Outcome 3 of 5

Free HEXCO NC Accountancy notes on The Law of Contract, learning outcome 3 of 5 in Business Law 1. Law in society and business, the Zimbabwe legal system and general principles of law. Semester 2, module 310/22/M07.

Here we learn what a contract is, the essentials of a valid contract, the rules of offer and acceptance, contracts formed by signed and unsigned documents, the terms and conditions of contracts, void and voidable contracts, breach and its remedies, and the ways a contract comes to an end.

Business runs on contracts, from buying stock and hiring staff to renting premises and borrowing money, so knowing when an agreement is legally binding protects the business from costly disputes.

3.1 The Concept of a Contract

Not every agreement is a contract, because the law enforces only agreements that meet certain requirements.

These requirements are called the essentials of a valid contract.

Definition of a Contract

A contract is an agreement between two or more parties, made with the intention of creating legal obligations, which the law will enforce.

Each party gets rights and takes on duties, for example a seller must deliver the goods and has the right to be paid, while the buyer must pay and has the right to receive the goods.

Essentials of a Valid Contract

For a contract to be valid, all of these requirements must be met:

Consensus ad idem

The parties must reach agreement on the same thing, meaning a true meeting of the minds on the essential terms, usually shown by a valid offer and acceptance.

Animus contrahendi

The parties must intend to create legal obligations. Social arrangements, such as an invitation to dinner, are not contracts because there is no such intention.

Legal capacity

The parties must have the capacity to contract. Minors (under 18), people who are mentally ill and people who are very drunk may lack full capacity, and contracts with them may be void or unenforceable without assistance.

Legality

The agreement must be lawful and not against public policy or good morals. An agreement to sell stolen goods or to bribe an official is void.

Possibility of performance

Performance must be possible when the contract is made. An agreement to sell a car that has already been destroyed is void.

Communicated agreement and formalities

The agreement must be communicated between the parties, and any formality required by law, such as writing and signatures for a sale of land, must be complied with.

3.2 Offer and Acceptance

Agreement is usually reached when one party makes an offer and the other accepts it.

The law has rules for both, which decide exactly when and where a contract comes into existence.

Definition of an Offer

An offer is a proposal by one person (the offeror) to another (the offeree), stating the terms on which the offeror is willing to be bound, so that a contract is formed as soon as the offeree accepts. An offer must be distinguished from an invitation to do business, such as goods displayed with price tags, adverts and catalogues, which only invite people to make offers.

Essentials of a Valid Offer

A valid offer must be made with serious intent to be bound, not as a joke. It must be definite and certain in its terms, such as the goods and the price. It must be communicated to the offeree, because one cannot accept an offer one does not know about. It must be unequivocal, meaning clear and firm rather than a mere statement of possible willingness. It must not have been revoked before acceptance, and it must comply with the essentials of a valid contract, such as legality and possibility.

Termination of an Offer

An offer ends, and can no longer be accepted, in these ways:

Lapse of time

The offer ends when the time set for acceptance expires or, if none was set, after a reasonable time.

Revocation

The offeror may withdraw the offer before it is accepted, provided the withdrawal reaches the offeree, unless the offeror promised to keep it open (an option).

Rejection

The offeree refuses the offer, which then falls away and cannot later be accepted.

Death or insanity

The death or insanity of either party before acceptance normally ends the offer.

Counter-offer

A reply that changes the terms, such as offering a lower price, is a rejection of the original offer and a new offer in its place.

Definition of Acceptance

Acceptance is the offeree's clear and unconditional agreement to the terms of the offer, communicated to the offeror, which creates the contract.

Essentials of a Valid Acceptance

The acceptance must be unconditional, agreeing to all the terms without changes. It must be communicated to the offeror; silence is generally not acceptance. The offeree must have knowledge of the offer, so a person who returns lost property without knowing of a reward has not accepted the reward offer. It must follow any method of acceptance prescribed by the offeror, such as in writing. It must be made by the person to whom the offer was made, so only the intended offeree, or anyone if the offer was made to the public, may accept. Under the expedition theory, an acceptance sent by post is complete when posted, while under the information theory, which generally applies, the contract is formed when the offeror learns of the acceptance.

3.3 Contracts without Offer and Acceptance

Some contracts are formed when a person signs or accepts a document, without a clear offer and acceptance being identifiable.

The law then asks whether the person is bound by the document's terms.

Signed Documents

A person who signs a contractual document is generally bound by its terms, whether or not they read them; this is the rule known as caveat subscriptor ('let the signer beware'). The signer may escape only in limited cases, such as fraud, misrepresentation of the document's contents by the other party, or a reasonable and material mistake (iustus error). For this reason, documents should always be read before signing.

Unsigned Documents

Unsigned documents, such as tickets, receipts and delivery notes, may contain terms. The person receiving them is bound only if the document is the kind that normally contains terms, and the other party took reasonable steps to bring the terms to their attention before or when the contract was made. Terms printed on the back of a receipt handed over after payment are usually too late to bind the customer.

Notices Incorporated into Contracts

Terms may also be included through notices, such as 'Vehicles parked at owner's risk' at a car park, or 'No refunds on sale goods' in a shop. A notice binds a customer only if it is clearly displayed where it would be seen before the contract is made. A notice put up inside a hotel room, seen only after the booking, is too late.

3.4 Terms of Contracts

The terms of a contract are the rights and duties the parties have agreed to or that the law adds.

Some terms are written or spoken, while others are implied.

Express and Implied Terms

Express terms are those the parties have actually stated, in writing or orally, such as the price and delivery date. Implied terms are not stated but form part of the contract:

Terms implied by law

The law automatically adds certain terms to particular types of contract, unless excluded, such as the seller's duty in a sale to guarantee the buyer against latent defects and eviction.

Terms implied by trade usage

A custom that is well known, certain and reasonable in a particular trade or place becomes part of contracts in that trade.

Imposed terms

Terms required by legislation, such as consumer protection and labour laws, apply even if the parties try to agree otherwise.

Tacit terms

Terms the parties did not express but obviously intended, which the court finds by asking what they would both have said if asked at the time.

Conditions in Contracts

A condition makes the contract depend on an uncertain future event. A suspensive condition suspends the contract until the event happens; for example, a house is sold 'subject to the buyer obtaining a bank loan', so the sale takes effect only if the loan is granted. A resolutive condition means the contract takes effect at once but ends if the event happens; for example, a lease that ends if the tenant is transferred to another town.

3.5 Valid, Void and Voidable Contracts

Whether an agreement can be enforced depends on whether it meets all the essentials and was freely made.

The law therefore classifies contracts as valid, void or voidable.

The Three Classes

A valid contract meets all the essentials and is fully enforceable. A void contract has no legal effect at all from the start, because an essential is missing, such as illegality or impossibility; neither party can enforce it. A voidable contract is valid until the innocent party chooses to set it aside (rescind), because their consent was obtained improperly. The innocent party may instead choose to uphold it.

Grounds Making a Contract Voidable

These are the main ways in which consent is obtained improperly:

Misrepresentation

A false statement of fact made by one party that induces the other to contract. It may be fraudulent, negligent or innocent. For example, a seller falsely says a vehicle has never been in an accident.

Duress

Consent obtained by threats of harm to the person, their family or property, causing reasonable fear. For example, a supplier threatened with violence unless he signs.

Undue influence

One party uses a position of influence over a weaker party to obtain an unfair agreement, for example a guardian pressing an elderly relative to sell property cheaply.

3.6 Breach of Contract and Remedies

A breach of contract happens when a party fails to perform as agreed, without a lawful excuse.

The innocent party may then use one or more remedies.

Definition of Breach of Contract

Breach of contract is the failure of a party, without lawful excuse, to perform any of their obligations under the contract, whether by not performing, performing late, performing badly or refusing to perform.

Forms of Breach

The table explains the main forms of breach recognised in our law.

Form of breach	Explanation
Repudiation A clear refusal to perform.	A party shows, by words or conduct, that they will not perform, such as a supplier announcing it will not deliver.
Mora debitoris Late performance by the debtor.	The party who must perform fails to do so on time, such as a buyer not paying by the agreed date.
Mora creditoris Delay by the creditor.	The party who must receive performance fails to cooperate, such as a buyer who refuses to take delivery.
Positive malperformance Performance that is defective.	The party performs, but badly, such as delivering goods of the wrong quality or a builder using poor materials.
Prevention of performance Performance made impossible by a party.	A party makes performance impossible through their own fault, such as selling the goods to someone else.

Remedies for Breach

The innocent party may claim the following remedies:

Specific performance

A court order that the party in breach must do what they promised, such as deliver the goods. The court may refuse it where it is impossible or unfair, and award damages instead.

Cancellation (rescission)

The innocent party may cancel the contract if the breach is serious (material), or if the contract allows it, and both parties return what they received.

Damages

Money compensation for the financial loss caused by the breach, putting the innocent party in the position they would have been in had the contract been performed. Damages may be claimed together with specific performance or cancellation.

Interdict

A court order stopping a party from doing something that breaches the contract, such as an employee using confidential customer lists in breach of a restraint.

3.7 Termination of Contracts

Contractual obligations do not last forever.

They come to an end in several ways recognised by law.

Ways of Terminating a Contract

The table explains each way in which a contract, or an obligation under it, ends.

Method	Explanation
Performance The parties do what they promised.	The most common way: the goods are delivered and paid for, so the obligations end.
Set-off (compensatio) Mutual debts cancel out.	Where two parties owe each other money that is due, the debts cancel to the extent of the smaller one.
Compromise (transactio) A settlement of a dispute.	The parties settle a disputed claim by agreement, replacing the old obligation with the settlement.
Novation A new contract replaces the old.	The parties agree to replace an existing obligation with a new one, which extinguishes the old.
Release or waiver The creditor gives up the right.	The creditor agrees to free the debtor from the obligation, wholly or partly.
Extinctive prescription The right is lost through time.	A debt is extinguished if the creditor fails to claim it within the period set by the Prescription Act, which for most ordinary debts is three years.
Judgement A court decision.	Once a court gives judgment, the original claim is replaced by the judgment debt.
Impossibility of performance Performance becomes impossible.	If, after the contract is made, performance becomes objectively impossible without fault, such as the goods being destroyed by fire, the obligation ends.
Merger (confusio) Creditor and debtor become one.	If the same person becomes both debtor and creditor, such as by inheriting the debt, the obligation ends.
Insolvency The debtor is declared insolvent.	Claims are dealt with under insolvency law, and after rehabilitation, remaining debts generally fall away.