Contract Law

Contract Law

A contract is a voluntary legally enforceable bilateral or multilateral agreement that confers rights and obligations between the parties. Contract law is a part of private civil law.

Agreement (offer and acceptance)

Formation of a contract involves an agreement between the parties i.e. it requires the parties to reach mutual assent (“a meeting of the minds”). An agreement is reached when one party makes an offer which is accepted unequivocally by the other party. If a party makes a counter-offer then no contract is formed unless that counter-offer is accepted without qualification by the party receiving it (known as the “mirror image rule”). In commercial and business contracts offers and counter offers usually go back and forth until a final agreement is reached usually reduced to writing.

Written and oral contracts

In daily life agreements tend to be made by parol (i.e be oral/ verbal/ by word of mouth) e.g. buying something from a supermarket. Generally there is no law prohibiting this (with some exceptions) so contracts can be made orally, in writing, or partly orally and partly in writing, or may be implied from the conduct of the parties. As there is no written evidence for an oral or unspoken contract (implied-in-fact contract), this type of contract is inferred or implied by the acts of the parties under which the parties receive the “benefit of the bargain”.

In general, a person who makes an oral contract or signs a contractual document will be bound by its terms, rights and obligations. If a contract is in a written form, and somebody signs it, then the signer is typically bound by its terms regardless of whether they have actually read it and the rule caveat emptor (he who signs beware) has application

If a specific legal formality requires a lawfully binding contract to be in written form, or signed by the parties or witnesses or even be attested by a notary public e.g. in leases, or building contracts, then an oral contract with that subject matter shall be unenforceable in law.

Special cases

Contracts may be implied by conduct e.g. when ordering a meal in a restaurant the customer is obliged to pay after eating.
Contracts may be implied by law (quasi-contracts) when a person lawfully does or delivers anything to another interested person not intending to do so gratuitously and the other person benefits, then the latter is bound to make compensation to the former because otherwise the latter would be unjustly enriched.
Similar situations are quantum meruit (“what one has earned”) situations when a reasonable (going rate) sum of money must be paid for services rendered or work done if an amount was not agreed previously.
A person who pays because he/she is bound by law to pay is entitled to be reimbursed by the person who is interested in the payment of that money (e.g. a guarantor paying the debt of a principal).
Where something is advertised in a newspaper, a poster, on a shop window, or on a retail shelf, this will not constitute an offer, but only an “invitation to treat” an interested customer, indicating that the merchant is prepared to negotiate around that price. If the terms of the invitation to treat incorporates a term e.g. acceptance by the seller if the customer presenting goods to a cashier without any negotiations, then that term of the invitation to treat cannot be varied by negotiations at the till.
In some special cases, contracts can be made by an offer to “the whole world” e.g. a reward for a lost pet. The finder may still claim the reward because when he/she brings the pet to the owner he/she is deemed to have accepted the offer, and these do not constitute an invitation to treat unless the offer is ridiculous or a gimmick by reasonable standards.
In auctions the sale is complete when the auctioneer announces its completion by the fall of the hammer or in internet auctions when time is out, or in other customary manner. Until the “announcement” is made any bidder may retract the bid.

Capacity to contract

Each party to a contract must be able or competent in law (have the capacity) to enter into a legally binding agreement. Incapacity to contract by any of the parties renders the contract void from the beginning. All persons of sound mind over the age of 18 are deemed able to make contracts. Persons disqualified from making contracts are therefore:

Minors. An exception is a person furnishing necessaries suited to the conditions in life of another person without capacity to contract e.g. a sandwich sold to a minor however, if the minor voids the contract, he/she must return the benefits received.
Persons of unsound mind e.g. mentally ill or in such a drowsy or intoxicated state not capable of understanding it and of forming a rational judgment as to its effect upon his/her interests.
Persons disqualified from contracting by any Law e.g. under administration or bankrupt.
Company directors who cannot bind their company when acting ultra vires (beyond their power).

Intention to create legal relations (to be bound)

Not all agreements about something are necessarily contractual. The parties in agreement must have an intention to be legally bound. Domestic or social agreements such as between parents and siblings e.g. to give presents or between friends e.g. to buy a friend a drink if one wins the other in a dart game, are clear situations when the parties do not intend to be legally bound. The same goes for a “gentlemen's agreement” which is binding only “in honour”. These agreements are unenforceable in law.

In commercial agreements on the other hand, it is presumed that parties intend to be legally bound, unless the parties expressly state the opposite e.g. clearly state that the agreement is a “statement of intention”. In some situations such as in a “head terms” agreement (outlining the main terms by which the parties agree, making it worthwhile for them to enter into negotiations) the parties clearly do not intend to be legally bound unless the negotiations are fruitful.

Consideration

This is a concept of common law, and is a bilateral requirement of every contract which is not a “deed” without which the parties cannot bind themselves in mutual obligations. Consideration is a right, interest, benefit, goods, money, profit, act, forbearance, detriment, loss, or responsibility of the contract given by one party to the other. In simple terms it is the price for which the promise of the other is bought, a promise that something valuable shall be given by one party in exchange for something valuable given by the other in return.

Past consideration: Consideration must be given as part of entering the contract, not prior as “past” consideration. The rule is that past consideration is not good consideration but is subject to the following exception:

The promisee performed an act at the request of the promisor.
It was understood or implied between the parties that the promisee would be rewarded for doing the act.
If the promise was made before the promisee provided the consideration it must be a promise capable of being enforced i.e. give rise to a legally binding contract.

Sufficient Consideration: An agreement to which the consent of the promisor is freely given is not void merely because such consideration is inadequate as long as it is sufficient. Sufficiency is defined as meeting the test of law, whereas adequacy is defined as the subjective fairness or equivalence to the other parties obligation. However, the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.

Deeds: Deeds are an exception to the rule that consideration must be bilateral. A deed (meaning “evidence”) is a legal instrument in writing that gives the beneficiary an interest, right, or property and is signed and attested by two witnesses and (in some jurisdictions) sealed. Deeds made in the proper form can be unilateral i.e. without consideration given by the beneficiary.

Privity of Contract

Third parties who are not included as parties to a contract may not sue for a benefit conferred on them, nor can that contract create rights or impose obligations on any person who is not a party to the contract. There are some exceptions to this general rule, which are:

Collateral Contracts: These circumvent privity provisions if they are made between the third party and one of the contracting parties.
Trusts: The beneficiary is entitled to sue the trustee.
Land Law: Restrictive covenants, leases, mortgages, charges, rights or easements are attached to the land (are proprietary) and can be imposed upon successors in title.
Agency. An agent may be permitted to assign his/her contractual rights to another person.
Leases: A tenant may be permitted to assign his/her contractual rights to another person.
Assignment: A party to the contract may be permitted to assign the benefits of a contract to a third party.
Third-party insurance: A third party e.g. an heir may claim under the provisions of an insurance policy if it was made for their benefit regardless of the fact that the third party din not pay any of the premiums.
Acknowledged debts e.g. debts may by a court order may be collected by third parties who are creditors of the debtor.

Contract Terms

Terms and Warrantees: Any provision, paragraph, clause, or stipulation in a contract may be:

A covenant or condition precedent which is a stipulation essential to the main purpose of the contract i.e. a material part of the agreement, or
A warranty (representation) which is a stipulation collateral to the main purpose of the contract i.e. a statement of fact or a factual promise which is not material to the agreement.

A breach of a condition by one party gives rise to a right to the other party treat the contract as repudiated and be discharged of it. A breach of a warranty by one party however only gives the other party a right to raise a claim for damages or other remedies but not but not to a right to treat the contract as repudiated or be discharged from the contract. Whether a stipulation in a contract is a condition or a warranty depends on the construction (interpretation) of the contract in each case and is determined by the courts trying to put into effect the parties’ intent or aim. A stipulation may be a condition, though called a warranty in the contract.

Uncertain terms: If the terms of the contract are uncertain or incomplete then there is no agreement and agreements, the meaning of which is not certain, or capable of being made certain, are void. If some of the terms are uncertain or incomplete but can objectively and reasonably be severed (ignored or set aside) leaving a useful remaining contract that can stand alone without those terms, then a court may order their severance if this is in the interest of justice. Sometimes any “penal” clause (obliging a party to pay a penalty) in a contract may be severable or deemed unenforceable.

Implied Terms: An express term is written explicitly in a contract. However, an implied term is not stated but may nevertheless form a provision of the contract if it is implied in fact or in law.

Terms may be implied due to the factual circumstances or conduct of the parties.

Two tests are used by the courts to imply terms as follows:

The business efficacy test: Where the minimum terms that are deemed necessary to give “business efficacy” to the contract will be implied by the courts.
The officious bystander test: Where a term may only be implied an “officious bystander” present at the contract negotiations would have proposed that the term should be included in the contract and the parties would undoubtedly agree.

Terms may be implied by custom or usage in a particular industry, market or context. For this to apply the term needs to be so well known to the industry that no one who makes a contract in that industry would need to mention it but would reasonably expect it to be part of the contract.
Terms implied in law: In the Cypriot Sale of Goods Law 10(I).1994 there are many terms which are implied in a consumer contract.

That a seller he has a right (ownership) to sell the goods at the time of the agreement and at the time when the property is to pass;
That the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contract is made.
That the buyer shall have and enjoy quiet possession of the goods
Where goods are sold by description, that the goods shall correspond with the description.
Where goods are sold by sample as well as by description it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description.
Where the goods are sold by sample that they correspond with the sample in quality and that the shall be free from any defect, making their quality unsatisfactory, which would not be apparent on reasonable examination of the sample.
That the goods supplied under a contract are of satisfactory quality (i.e. they meet the standard that a reasonable person would regard as satisfactory taking account of any description of the goods, the price (if relevant) and all other relevant circumstances which may be implied by usage of trade). Quality of goods includes their state, condition the fitness for all the purposes for which such goods are commonly supplied (may be implied by usage of trade), appearance and final finish, freedom from minor defects, safety and reasonable durability in the course of time and use taking into account the availability of spare parts and experienced technicians necessary to maintain such durability.

Void and voidable contracts

A void contract is one that never came into existence. A voidable contract is one that one or both parties may declare as ineffective at their discretion. All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not expressly declared to be void by legal provisions. Parties to a contract consent when they agree upon the same thing in the same sense. Consent is said to be “free consent” when it is not the product of:

Coercion: Means committing or threatening to commit any act forbidden by the criminal code or the unlawful detaining, or threatening to detain any property, which are acts done to the detriment of any person with the intention of causing any person to enter into an agreement.
Undue influence: Occurs where the relations that exist between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair contractual advantage over the other. A person is deemed to be in a position to dominate the will of another:

Where that person holds a real or apparent authority over the other.
Where that person stands in a fiduciary relation to the other.
Where that person makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.
Where a transaction appears to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.

Fraud: A any act committed by a party to a contract, or by another with that party’s participation, or by that party’s agent, with intent to:

Deceive another party or the other party’s agent, or
Induce another party
to enter into the contract. This act must be:
A suggestion as to a fact which is not true by a person who does not believe it to be true.
An active concealment of a fact by one having knowledge or belief of the fact.
A promise made without any intention of performing it.
Any other act fitted to deceive
Any act or omission specially declared by law to be fraudulent.
Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that when taken into account the person keeping silence has the duty of to speak unless the silence is in itself equivalent to speech.

Misrepresentation: This includes:

A positive affirmation of something which is not true, though the person making it believes it to be true, in a way that is not justified by the information known to the person making it
Any breach of duty which, without an intention to deceive, gains an advantage to the person committing it by misleading another person to their detriment.
Causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject to the agreement.

Mistake: Occurs where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement (non est factum i.e. this is not my deed). An false opinion as to the value of the goods that forms the subject-matter of the agreement does not constitute a mistake as to a matter of fact. A mistake about the provisions of any law of the country does not constitute a mistake as to a matter of fact, but a mistake as to a law of another country is considered to be a mistake of fact.

Consent is said to be a “caused consent” if it would not have been given but for the existence of the above situations.

When consent to an agreement is caused by undue influence, coercion, fraud or misrepresentation, the agreement is voidable at the option of the party whose consent was “caused”. A party to a voidable contract may at his/her discretion insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true.

However a fraud or misrepresentation which did not “cause” consent (e.g. because the other party was not fooled) does not render a contract voidable. Also if a party makes a fraudulent misrepresentation to a party who had the means of discovering the truth with ordinary diligence, then the contract shall not be deemed voidable.

When consent to an agreement is caused by mistake as to a matter of fact than the agreement is null and void and the parties do not have discretion to insist that the contract shall be performed. However if only one of the parties is under a mistake as to a matter of fact the contract is still valid.

Illegal contracts

Every agreement that contravenes the law is void, such as:

Every agreement in restraint of the marriage of any person.
Every agreement by which any a person is restrained from exercising a lawful profession, trade, or business of any kind.
Every agreement by which any party is restricted absolutely from enforcing his/her rights under or in respect of any contract, by the usual legal proceedings in the courts, or which limits the time within which he may thus enforce his/her rights, is void to that extent.
Agreements by way of wager are void.
Agreements for the sale and purchase of controlled substances (drugs).
All agreements that contravene the provisions of a law are void e.g. contracts agreeing to work for less than minimum wage or forfeiting the right to payment, or working more than the minimum hours etc.

Frustration

This is a doctrine that acts as a device to set aside contracts where an unforeseen event (a force majure) either renders contractual obligations impossible, or radically changes the party's principal purpose for entering into the contract e.g. a car is sold but before it is transferred to the other party the car is destroyed by a fire, a shipment cannot be delivered because the ship sunk etc.

Performance

Performance of the duties and obligations arising from a contract may vary according to the particular circumstances of each agreement. Some agreements have long durations and obligations are being performed throughout whence they are called executory contracts. When a contract is completed it is called fexecuted contract.

Disputes

Procedure: The injured party may, terminate the contract if there is a breach of a material term, and file a civil lawsuit in court against the party at fault. If there is a breach of a warranty and does not warrant termination of the contract then the injured party can only claim sue for damages whereas in urgent cases the injured party may applying for an interim injunction to prevent a breach where such breach would result in irreparable harm that could not be adequately remedied by monetary damages.

Choice of law: When a contract dispute arises between parties that are in different jurisdictions, the choice of court that shall try the case and the applicable law to be used for interpretation of the contract is dependent on:

A choice of law or jurisdiction clause agreed between the parties to the contract, or if this is has not been agreed in the contract, then

If a court has jurisdiction to try the case then it may try it, or
Even if the court has jurisdiction to try the case it may apply the he principle of forum conviniens i.e. allow the case to be tried by the most convenient forum that has the strongest connection to the subject matter of the contract for the trial of the case.

Within the European Union, even when the parties have negotiated a choice of law clause, conflict of law issues may be governed by the Rome I Regulation of 2008.
Also within the European Union, even when the parties have negotiated a choice of jurisdiction clause, conflict of law issues may be governed by the Brussels regime which is incorporated in Brussels I Regulation of 2001.

Remedies

The remedies for a breach of contract are not aimed at compensating the injured party as in tort. They are aimed in bringing the injured party in the same position it would have been had the contract been performed in its fullest.

After a breach, the injured party has a duty to mitigate loss by taking any reasonable steps to do so. Failure to mitigate loss may mean reduction of the damages awarded or even denial of an award of damages.

Remedies for breach of contract include damages (monetary compensation for losses) and, for serious breaches only, repudiation (i.e. termination of the contract) and/or specific performance.

Damages may be given for various reasons:

Compensatory damages: These are given to the party which was injured by the breach of contract to compensate it for actual losses suffered as accurately as possible. These are two forked:

Reliance (direct) damages: Awarded where no reasonably reliable estimate of expectation loss can be arrived at or at the option of the plaintiff. Reliance losses also cover expense suffered in reliance to the promise e.g. damages incurred by the injured party in performing some or all the obligations of the contract.
Expectation (consequential) damages: Awarded to put the party in as good of a position as the party would have been in had the contract been performed as promised e.g. damages that would be incurred by the injured party because of the breach of the contract. These damages may not naturally flow from a breach but is naturally supposed to be likely by both parties at the time of forming the contract. However to recover damages, an injured party must show that the breach of contract caused a foreseeable and not a remote loss (to the objective bystander).

Some contracts have a “liquidated damages” clause that incorporates a fair estimate of the loss which the parties pre-agree that would be incurred in case of breach, so that the court avoids calculating compensatory damages because the parties have greater certainty about them. These should not be confused with penalty clauses.

In some cases nominal damages (small cash amount) are awarded if the court decides that the breach was such that the injured party did not incur quantifiable pecuniary losses.

General, increased, punitive or exemplary damages: These are awarded over and above the compensatory damages and are used as a means punish the party at fault

If under the circumstances damages are deemed by the court to be insufficient because it would be unjust to permit the defaulting party simply to buy out the injured party with money, the equitable remedy of specific performance may also be available. Specific performance requires the party at fault to make a specific act in order to perform a contractual obligation e.g. to transfer title of property to the injured party, or return an art collection. This is a restitutionary remedy based on the principle that the party at fault should not be allowed to gain from the breach rather than calculating the plaintiff's losses. This equitable remedy is not available as of right and a court will not normally order it with immovable property being a usual exception. Related to orders e.g. an injunction prohibiting the alienation of the property may also be awarded.

Commercial contracts

Contracts are widely used in commercial law, and are the legal basis of all commercial transactions across the globe e.g. contracts for the sale of goods and services, carriage by air, sea land contracts, construction contracts, sale or lease of land contracts, employment contracts, insurance policies etc.

Online contracts have also become common and the EU has a specific directive to cover such situations i.e. the Consumer Rights Directive. Also, e-signature laws have made the electronic contract and signature as legally valid as a paper contract.

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Void and voidable contracts.
Contract terms issues and disputes.
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