CONTRACT

A contract is a legally binding agreement or relationship that exists between two or more parties to do or abstain from performing certain acts. A contract can also be defined as a legally binding exchange of promises between two or more parties that the law will enforce. The main distinction between a contract and an agreement is: All contracts are agreement but all agreements are not contracts. An agreement is a form of cross reference between different parties, which may be written, oral and lies upon the honour of the parties for its fulfilment rather than being in any way enforceable. On the other hand, all contracts are agreement because there must be mutual understanding between two parties for a contract to be formed. All parties should agree and adhere to the terms and conditions of an offer.

In business law, a contract is defined as an agreement between two or more parties, with legal binding enforceable in the court of law. There are many other stages involved in the formation and acceptance of a legal contract. In American English, the legal definition of a contract goes beyond the definition of an “Agreement”. The definition of a contract that comes from the American Law Institute states that, “a contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. The basic stages of any contract include – proposal, offer, acceptance, agreement and consideration.

Other definitions of contract are as follows:

• Contract is an agreement backed by lawful consideration to carry out actions, exchange assets, or refrain from doing things. A legally valid contract is reached through mutual agreement by persons with the capacity to negotiate, in which each gives up something of value. It must be for a lawful purpose (Banking Dictionary).
• Contract is an agreement between competent parties to do or not to do certain things for a Consideration. To have a valid contract for the sale of real estate there must be:
• An offer
• An acceptance
• Offer and acceptance
• Competent Parties
• Consideration
• Legal purpose
• Written documentation
• Description of the property
• Signatures by principals or their attorney-in-fact

         (Real Estate Dictionary)

• Contract is an agreement made between two or more persons to secure a result which each intends should benefit him or her. Although every participant anticipates a gain, it does not follow that each will benefit to an equal amount; indeed, one or more may lose in the event. Legal systems and their students are concerned with questions like:
• Which contracts should be legally enforceable?
• Should contracts be enforced by requiring that they be carried out, or by assessing compensation due to the aggrieved party if they are not?
• What is the proper way to analyse a contract—as a pair of promises, as an offer coupled with an acceptance, as a promise given for a reasonable consideration?

Contracts are also of importance in exemplifying the relation between rights and duties, which seems particularly symmetrical in the case of consensual contract. Each party acquires duties and rights as a result of the contract, and one person’s right has a clear relation with other persons’ duties. An important political application has been the social contract, under which the state, the political community, or legitimate authority is seen as the consequence of a contract drawn up to secure that result. The idea of a social contract has been criticized for historical inadequacy, and for misconceiving the relation between individuals and society or the state (Andrew Reeve & Political Dictionary).

• Contract is a legally binding agreement between two or more parties in which there is an acceptance by one party of an offer made by the other party, there is evidence that the acceptance is intentional, and there is some kind of consideration or benefit that one party must confer on the other in return for the benefit received (Archaeology Dictionary).

• Contract is defined as a promise, or set of promises, for breach of which the law gives a remedy, or the performance of which the law in some way recognises as a duty. The essentials of a valid contract are “parties competent to contract, a proper subject-matter, consideration, mutuality of agreement, and mutuality of obligation; “a transaction involving two or more individuals whereby each becomes obligated to the other, with reciprocal rights to demand performance of what is promised by each respectively. The total legal obligation which results from the parties’ agreement as affected by law (Law Dictionary).

 Nature of contract

Typically, contracts are oral or written; but written contracts have typically been preferred in common law legal systems; in 1677 England passed the Statute of Frauds which influenced similar statute of frauds laws in the United States and other countries such as Austral In general, the Uniform Commercial Code as adopted in the United States requires a written contract for tangible product sales in excess of $500, and real estate contracts are required to be written. If the contract is not required by law to be written, an oral contract is valid and therefore legally binding. The United Kingdom has since replaced the original Statute of Frauds, but written contracts are still required for various circumstances such as land (through the Law of Property Act 1925).

An oral contract may also be called a parole (i.e. word of honour, or promise) contract or a verbal contract, with ‘verbal’ meaning ‘spoken’ rather than ‘in words’. 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 provided the document is contractual in nature. However, affirmative defenses such as duress or unconscionability may enable the signer to avoid the obligation. Further, reasonable notice of a contract’s terms must be given to the other party prior to their entry into the contract.

An unwritten, unspoken contract, also known as ‘a contract implied by the acts of the parties’, which can be either an implied-in-fact contract or implied-in-law contract, may also be legally binding. Implied-in-fact contracts are real contracts under which the parties receive the “benefit of the bargain”. However, contracts implied in law are also known as quasi-contracts, and the remedy is quantum meruit, the fair market value of goods or services rendered.

Types of Contracts

There are various types of contracts in business law depending upon various legal transactions like transfer of property, sale of goods, etc. A formal legal advice is always recommended prior to making or accepting a business contract. Examples of business contract are:

• Express Contracts: In this type of contract, the parties to the contract state the terms and conditions either by word of mouth or in writing, at the time of forming the contract. A definite written or oral proposal of the contract is accepted by an offeree in a way that explicitly defines legal consent to the terms of the contract.
• Implied Contracts: Contracts implied in fact and contracts implied in law are both a part of implied contracts. But a real implied contract consists of certain obligations that arise from a mutual agreement and intention of promise, which is not expressed verbally. An implied contract cannot be labeled as implied in law because such a contract lacks the requirements of a true contract. The term “Quasi Contract“, is however, a more specific identification of contracts implied in law. Implied contracts depend on the reason behind their existence. Thus, for an implied contract to develop, there must be some transaction, act or conduct of a party in order for them to be legally bound. A contract will not be implied if there are any chances of harm or inequity. If there is no clarity of communication, implication and understanding between the two parties, the court will not conclude any contractual relationship between the two parties. If the parties continue to follow their contractual terms, even after the contract has ceased to exist, an assumption arises that the two parties have mutually agreed to a new contract that has same provisions as the old contract and a new implied contract is formed.
• Executed Contracts: An executed contract is termed as an agreement in which no other transaction is left out to be executed by either party. This definition could be incorrect to a certain extent, since completion of work will mean that the contract has ended. But in case of executed contracts, there exists some act/transaction or an obligation that has to be performed at some point of time in the future according to the contractual terms.
• Bilateral and Unilateral Contracts: If two entities exchange a mutual and reciprocal promise that implicates the execution of an act, an obligation or a transaction or forbearance from execution of an act or an obligation, with respect to every party involved in the contract, is termed as bilateral contract in the language of law. It is also called a two-sided contract because of the two-way promises made by parties involved in the contract.
• A unilateral contract is a promise made by only one party. The offerer promises to execute a certain act or an obligation if the offeree agrees on performing a requested act that is understood as a legally enforceable contract. It just requires an acceptance from the other party to get the contract executed. Thus, this is a one-sided contract since only the offerer is bound to the court of law. One important point of this type of contract is that, the offeree cannot be sued for refraining, abandoning or even failing to execute his act, since he does not promise anything.
• Aleatory Contracts: Aleatory means ‘dependent on chance’. Aleatory contract is a mutual agreement which comes into effect only in case of an occurrence of an uncertain event or a natural calamity is termed as an aleatory contract. In this type of contracts, both the parties may assume risks. For example, a fire insurance policy or a travel insurance is a type of aleatory contract as the policy holder will not receive any benefits of the contract unless in an event of fire occurrence or a plane crash (in case of travel insurance).
• Unconscionable Contracts: Unconscionable contracts are those that are unfair and unduly one-way favors of the party who stand at a superior end of the bargaining power. The word ‘unconscionable’ means an insult to justice and decency. No mentally healthy and honest person would ever accept an unconscionable contract and enter into it. Unconscionability of the contract is determined by analysing the situations and circumstances of the parties involved in the contract, when the contract was made. This doctrine is applied only in cases, in which it would be unjust or an affront to the integrity of the law system to enforce a contract like that. The court of law has found that unconscionable contracts are a result of exploitation of illiterate and impoverished consumers.
• Adhesion Contracts: Adhesion contracts are the ones that are drafted by a party who has a larger advantage in bargaining. This means that the party who has a bargaining advantage leaves the other party with no other option than to either accept the contract or to reject it. Commonly known as “take-it or leave-it” contracts, they are often considered because for most of the businesses, it is difficult to negotiate and bargain all the terms and conditions of every contract. It is not necessary that all adhesion contracts are unconscionable contracts, since in some cases it is quite coincident for one party to have a superior bargaining advantage leaving no option for the other party. This often happens in monopolistic markets. However, courts of law refuse to implement such contracts of adhesion on the grounds that there was no mutual understanding or an acceptance between the two parties involved in an adhesive contract.
• Void and Voidable Contracts: A void contract implies that the involved parties are not liable to any legal obligations or rights, meaning that the parties are not legally bound with reference to that contract. In fact, a void contract means a contract has ceased to exist and that there is no contract existing between the two parties.
• A voidable contract, on the other hand, is an agreement between any two or more parties that has a legal binding. A voidable contract can be treated as never been legally bound on a party that has been a victim of fraudulent execution or if that party was suffering from any legal disability. Also, a contract is not void unless and until any of the involved parties, choose to treat it as a void contract by confronting its implementation.

Essential elements of a valid contract

A contract is defined as an agreement enforceable by law. To be enforceable by law, an agreement must possess the essential elements of a valid contract.  All forms of agreements may be regarded as contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration, with a lawful object, are not expressly declared by law to be void, and where necessary, satisfy the requirements of any law as to writing or attention or registration. The essential elements of a valid contract are as follows:

1)  Offer and acceptance: There must a ‘lawful offer’ and a ‘lawful acceptance’ of the offer, thus resulting in an agreement. The most important feature of a contract is that one party makes an offer for an arrangement that another accepts. This can be called a concurrence of wills or ad idem (meeting of the minds) of two or more parties. There must be evidence that the parties had each from an objective perspective engaged in conduct manifesting their assent, and a contract will be formed when the parties have met such a requirement. An objective perspective means that it is only necessary that somebody gives the impression of offering or accepting contractual terms in the eyes of a reasonable person, not that they actually did want to form a contract.

An agreement is said to be reached when an offer capable of immediate acceptance is met with a ‘mirror image’ acceptance (i.e., an unqualified acceptance). The parties must have the necessary capacity to contract and the contract must not be trifling, indeterminate, impossible, or illegal. Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda (usually translated as ‘agreements to be kept’ but more literally ‘pacts must be kept’). Breach of contract is recognised by the law and remedies can be provided.

     Acceptance

• Acceptance must correspond absolutely in the terms of an offer but where an acceptance is otherwise, it is a counter offer. A content offer destroys the original offer and itself becomes a fresh offer
• An acceptance is also ineffective if it is made subject to the fulfilment of a condition’s such acceptance when made does not bring about a bundle contract. Se Winn V Bull, the defendant agreed to take the lease of a house subject to the drawing up of a formal contract.
• Where a contract is made provisional it has no independent legal quality. Its binding nature depends on the circumstance of the given care. Generally, where a contract is drawn up but made provisional, the contract is binding. By using the word ‘provisional’, parties intended the document to be an agreement binding from the onset.
• There cannot be consent or agreement to the terms of what a person is ignorant of. Acceptance presupposes the knowledge of the existence of an offer. If they follow that the acceptance in ignorance of an offer has no effect.

Communication of acceptance

As a general rule, acceptance has no effect unit it is communicated to the offeror; this can either be by writing or conduct. 

Exceptions – the requirement of actual notification of acceptance to the offeror is dispensed in the following situations.

• Communication to an agent: he must be an offertory’s agent and must have actual or implied authority to receive acceptance on offertory’s behalf.
• By estoppels: this is a situation in which the offeror is deemed to have notice of the acceptance in spite of the absence of actual communication
• Terms of offer; where an offer expressly stated the form in and an acceptance should take and acceptance is compiled in this manner. These are presumption of due communication notwithstanding that the message did not get to the offeror.
• Acceptance by post – when an acceptance is made by post, it takes effect on posting
• Unilateral contracts – here there is no need for communication. The performance and the specific or specified act indicate assent or an acceptance of the offer. In this case the defendant had contended that the plaintiff did not communicate to the offeror. The plea was rejected; the court held that in contracts of this nature, there is no need to communicate acceptance before performance.

Termination of an offer: If an offer is not accepted it can be terminated in any of the 4 following ways:

• By rejection: This really occurs where the offer is made specifically to an individual. This may be done expressly or by conduct. A counter offer is a way of rejecting an offer. Once a counter offer is made the original offer is destroyed.
• By revocation: An offer is revoked when it is withdrawn. This can be done anytime because it is accepted. Notice of revocation must reach the offered before the revocation would be effective. A revocation sent by post is not effective until it reaches the offered. Therefore, an acceptance posted after a revocation has been posted, but not yet received, will be valid and will create a binding contract.
• By death – an offer will lapse on the death of either party because acceptance is made. In the case of the offeror, the death must be communicated to the offered because he commutates his acceptance except where it is a contract of personal service and employment.
• Lapse of time: if an offer is not accepted, rejected or revoked it may lapse through efflux ion of time. This may occur where the offer is made open for a given period in if acceptance is not made it lapses. If no time limit is set the offer may lapse at the expiring of a reasonable time. This would depend on the subject matter and other circumstances e.g. perishable goods, or goods and value fluctuate.

Offer and acceptance does not always need to be expressed orally or in writing. An implied contract is one in which some of the terms are not expressed in words. This can take two forms. A contract which is implied in fact is one in which the circumstances imply that parties have reached an agreement even though they have not done so expressly. A contract which is implied in law is also called a quasi-contract, because it is not in fact a contract; rather, it is a means for the courts to remedy situations in which one party would be unjustly enriched where he or she is not required to compensate the other.

2) There must be an intention to create legal relations. Contract is an agreement enforceable by law is a contract.” A contract therefore, is an agreement the object of which is to create a legal obligation i.e., a duty enforceable by law. By this definition, a contract essentially consists of two elements: (i) An agreement and (ii) Legal obligation

3)  Lawful consideration. Consideration has been defined as the price paid by one party for the promise of the other and is a requirement for contracts under common law. Consideration (a legally-sufficient but not necessarily legally-adequate benefit or detriment accruing to the parties) or substitute therefore, such as through promissory estoppel (estoppel means a rule of evidence whereby a person is barred from denying the truth of a fact that has already been settled), moral obligation, or execution and delivery of a writing memorialising the contract executed under seal.

 The idea behind consideration is that both parties to a contract must bring something to the bargain. A party seeking to enforce a contract must show that it conferred some benefit or suffered some detriment (though it might be trivial) that is recognised by law. For example, money is often recognised as consideration, but in some cases money will not suffice as consideration (for example, when one party agrees to make partial payment of a debt in exchange for being released from the full amount).

The principal rules governing consideration include the following:

• Consideration must be ‘sufficient’ (i.e., recognisable by the law), but need not be ‘adequate’ (i.e. the consideration need not be a fair and reasonable exchange for the benefit of the promise).
• Consideration must not be from the past.
• Consideration must move from the promisee. For instance, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promisees, then consideration need only to move from one of the promisees’.
• The promise to do something one is already contractually obliged to do is not, traditionally, regarded as good consideration. The classic instance is Stilk v. Myrick, in which a captain’s promise to divide the wages of two deserters among the remaining crew if they would sail home from the Baltic short-handed, was found unenforceable on the grounds that the crew were already contracted to sail the ship through all perils of the sea.
• In Williams v. Roffey Bros & Nicholls (Contractors) Ltd the English Court of Appeal held that a promise by a joiner to complete the contracted work on time, where this was falling behind, was good consideration for the contractor’s promise to pay extra money. The reasoning adopted was that the strict rule of Stilk v. Myrick was no longer necessary, as English law now recognised a doctrine of economic duress to vitiate promises obtained when the promisor was “over a barrel” for financial reasons. Therefore, where the promise to pay extra could be seen as conferring a practical benefit on the promisor that could be good consideration for a variation of the terms.
• The promise must not be to do something one is already obliged by the general law to do – e.g., to give refrain from crime or to give evidence in court. However, a promise from A to do something for B if B will perform a contractual obligation B owes to C, will be enforceable – B is suffering a legal detriment by making his performance of his contract with A effectively enforceable by C as well as by A.

The consideration or object of an agreements is unlawful if —

• it is forbidden by law; or
• it is of such a nature that, if permitted it would defeat the provisions of any laws
• it is fraudulent; or
• it involves or implies injury to the person or property of another
• the court regards it as immoral or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.

4)   Capacity of parties. The contracting parties must be of the age of majority and of sound mind and must not be disqualified by any law to which they are subject. If any of the parties to the agreement suffers from minority, lunacy, idiocy, drunkenness etc. The agreement is not enforceable at law, except in some special cases e.g., in the case of necessaries supplied to a minor or lunatic, the supplier of goods is entitled to be reimbursed from their estate.

5)  Free consent. Free consent of all the parties to an agreement is another essential element. This concept has two aspects – (i) consent should be made and (ii) it should be free of any pressure or misunderstanding. Consent means that the parties must have agreed upon the same thing in the same sense.  There is absence of ‘free consent,’ if the agreement is induced by (i) coercion, (ii) undue influence, (iii) fraud, (iv) misrepresentation, or (v) mistake.

If the agreement is vitiated by any of the first four factors, the contract would be voidable and cannot be enforced by the party guilty of coercion, undue influence, etc. The other party (i.e., the aggrieved party) can either reject the contract or accept it, subject to the rules laid down in the act. If the agreement is induced by mutual mistake which is material to the agreement, it would be void.

6)   Lawful object. A legally enforceable contract is an exchange of promises with specific legal remedies for breach. These can include compensatory remedy, whereby the defaulting party is required to pay monies that would otherwise have been exchanged were the contract honoured, or an Equitable remedy such as Specific Performance, in which the person who entered into the contract is required to carry out the specific action they have reneged upon. As long as the good or service provided is legal, any oral agreement between two parties can constitute a binding legal contract. The practical limitation to this, however, is that generally only parties to a written agreement have material evidence (the written contract itself) to prove the actual terms uttered at the time the agreement was struck. In daily life, most contracts can be and are made orally, such as purchasing a book or a sandwich. Sometimes written contracts are required by either the parties, or by statutory law within various jurisdictions for certain types of agreement, for example when buying a house or land.

• Writing and registration. For a contract to be valid, it must be in writing and registered. A verbal exchange of promises may be binding and be as legally valid as a written contract. An unwritten, unspoken contract, also known as “a contract implied by the acts of the parties”, which can be either implied in fact or implied in law, may also be legally binding. If a contract is in a written form, and somebody signs the contract, then the person is bound by its terms regardless of whether they have read it or not, provided the document is contractual in nature. Furthermore, if a party wishes to use a document as the basis of a contract, reasonable notice of its terms must be given to the other party prior to their entry into the contract.

• Certainty. Agreements, the meaning of which is not certain or capable of being made certain, are void.”
• Possibility of performance. An agreement to do an act impossible in itself is void. If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law.
• Not expressly declared void.

In the absence of one or more of these essential elements, the contract may be void, avoidable or unenforceable. 

Invitation to Treat

This is where a product in large quantities is advertised in a newspaper or on a poster; it generally is not considered an offer but instead will be regarded as an invitation to treat, since there is no guarantee that the store can provide the item for everyone who might want one. A display of goods on the shelves of a self-service shop is also an invitation to treat, with the offer being made by the purchaser at the checkout and being accepted by the shop assistant operating the checkout: Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd. If the person who is to buy the advertised product is of importance, for instance because of his personality, etc., when buying land, it is regarded merely as an invitation to treat. In Carbolic Smoke Ball, the major difference was that a reward was included in the advertisement, which is a general exception to the rule and is then treated as an offer.

One of the most famous cases on invitation to treat is Carlill v. Carbolic Smoke Ball Company, decided in nineteenth-century England. A medical firm advertised that its new wonder drug, a smoke ball, would prevent those who used it according to the instructions from catching flu, and if it did not, buyers would receive £100 and said that they had deposited £1,000 in the bank to show their good faith. When sued, Carbolic argued the ad was not to be taken as a serious, legally binding offer; it was merely an invitation to treat, and a gimmick (a ‘mere puff’). But the Court of Appeal held that it would appear to a reasonable man that Carbolic had made a serious offer, primarily because of the reference to the £1,000 deposited into the bank. People had given good ‘consideration’ for it by going to the ‘distinct inconvenience’ of using a faulty product.

 Privity of contract and third parties

The doctrine of privity of contract means that only those involved in striking a bargain would have standing to enforce it. In general this is still the case, only parties to a contract may sue for the breach of a contract, although in recent years the rule of privity has eroded somewhat and third party beneficiaries have been allowed to recover damages for breaches of contracts they were not party to. In cases where facts involve third party beneficiaries or debtors to the original contracting party have been allowed to be considered parties for purposes of enforcement of the contract. A recent advance has been seen in the case law as well as statutory recognition to the dilution of the doctrine of privity of contract. The recent tests applied by courts have been the test of benefit and the duty owed test. The duty owed test looks to see if the third party was agreeing to pay a debt for the original party[needs elaboration] and whereas the benefit test looks to see if circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. Any defense allowed to parties of the original contract extends to third party beneficiaries.

Assignment

The benefit of a contract may be transferred to a third party by a process called assignment. This is a transaction between the person entitled to the benefit of the contract (called the creditor or assignor) and the third party (called the assignee) as a result of which the assignee becomes entitled to see the person liable under the contract (called the debtor).  The debtor is not a party to the transaction and his consent is not necessary to its validity. It is however easier to assign right than liabilities. This is because an assignment is liability will impose burden on a third party.

The subject matter of an assignment is always a ‘choose in action’. A choose in action has been defined by Per Channel J in the case of Tarkington versus Magee as a known legal expression used to describe al personal right of property and can only be claimed or enforced by action and not by taking physical possession. Thus a chose in action is not something that one can hold physically. It is just something over and one has a right. It is the right to be chosen that one can assign. The most common ones are debts, right under a trust, rights arising out of a tort or breach of contracts, legacies, patents, shares of copyrights.

Some rights and liability cannot be assigned, e.g.:

• Right under a purely personal contract e.g. marriage
• Contract for services involving the personal skill of perhaps of an artist, architect
• Pension of salaries of public officers cannot be assigned.

An Assignment of choose in action may be absolute or non-absolute. An absolute assignment transfer the whole of the assignor interest in the subject matter of the assignment of a mortgage to a mortgages and as much the mortgage will have the right to sell the mortgaged property in the event of a default.

An assignment is non-absolute if:

• It is conditional i.e. it becomes operative on the happening of a certain event
• If it is by way of a change, this is where the assignor asks that the assignee should be paid out of a particular fund
• If it is part of a debt.

Because of the problem of classifying assignment into different classes, the property and conveyance law of Western Nigeria 1959 and is similar to the English Law of property Act 1925 and applies to Nigeria, a new dimension has been brought into the law of assignment.  It provides for statutory assignment and provides that:

• An assignment must be absolute
• It must be in writing.
• Notice must be given to the debtor

This law of statutory assignment makes the law of assignment easier and less complicated. This statue has not changed the law but has only provided an easier procedure.

Negotiability

Special rules apply to the assignment of certain written contracts called negotiable instruments. The most important ones are bills of exchange, cheque and promissory notes. A bill of exchange is a written order made by one person (drawer) requiring another (drawee) to pay a sum of money either to the drawer, or to a third named person or simply to the bearer. The request may be to pay the money now or at some stated future time.  If the drawee accepts the request, he becomes liable as acceptor of the bill. A cheque is a bill of exchange drawn on a banker and payable on demand. A promissory note is an unconditional promise in writing to pay a person a sum of money.

 Negotiable instrument distinguished from Assignment

The transfer of a negotiable instrument e.g. checks and promissory notes differ from assignment because:

• No notice of transfer is required in order to make a party liable.
• Even if the transferor to a negotiable instrument does not have a good title, the transferee will still get a good title.
• Consideration does not have to move from the promise in respect of a negotiable instrument.

Novation

In Investopedia Financial Dictionary, novation is defined as the act of replacing one participating member of a contract with another; his rights, duties, and terms are transferred to the new party upon consent of all parties affected (the Investopedia Financial Dictionary). Novation is seen as a 3-party agreement whereby one party is released from a contract and another party is substituted. For example, John wants to buy Okocha’s home and assume the mortgage. Okocha wants to be released from all mortgage liability. Here, the mortgage bank cooperates and the three sign a novation whereby John is substituted for Okocha on the mortgage (Barron’s Real Estate Dictionary). Novation is also seen as a means through which one contract is substituted for another, with acceptance by all parties (Barron’s Real Estate Dictionary). The West’s Encyclopaedia of American Law defines novation as the substitution of a new contract for an old one. The new agreement extinguishes the rights and obligations that were in effect under the old agreement.

A novation ordinarily arises when a new individual assumes an obligation to pay what was incurred by the original party to the contract. It is distinguishable from the situation that occurs when another individual makes a guarantee that a debtor will pay what he or she owes to a creditor. In the case of a novation, the original debtor is totally released from the obligation, which is transferred to someone else. The nature of the transaction is dependent upon the agreement between the parties. A novation also takes place when the original parties continue their obligation to one another, but a new agreement is substituted for the old one (The West’s Encyclopaedia of American Law).

In contract law and business law, novation is the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party. In contrast to an assignment, which is valid so long as the obligee (person receiving the benefit of the bargain) is given notice, a novation is valid only with the consent of all parties to the original agreement: the obligee must consent to the replacement of the original obligor with the new obligor. A contract transferred by the novation process transfers all duties and obligations from the original obligor to the new obligor (Wikipedia, 2017).

Proving the existence of a contract

It may be necessary at some point to prove the existence of the contract or explain or defend its actions before a court or some other forum. An oral contract may be difficult to prove, for example, if the parties to the contract disagree on its terms or whether it was ever formed. A paper trail is important to proving a written or electronic contract. Care should be taken not to destroy relevant written evidence of a contract.

 Enforceability

Although a contract may have all of the essential elements, it may not be enforceable because of some other issue, such as:

• Lack of capacity of one of the parties (e.g. one of the parties is a child).
• Where a mistake is made about the nature of the contract. Relief may be granted where the mistake results in a substantially unequal exchange of values.
• Where there has been misrepresentation of a particular fact or facts inducing a person to enter into the contract. Under the common law and the statute, there may be a right to cancel the contract and/or claim damages.
• Where a contract is illegal or immoral or is effected by duress or undue influence of one party over another.
• Where a contract unduly restrains a person in their trade

Criteria for enforcement of contractual obligations  

For a contract to be valid, both parties must indicate that they agree to its terms. This is accomplished when one party submits an offer that the other accepts within a reasonable time or a stipulated period. If the terms of the acceptance vary from those of the offer, that “acceptance” legally constitutes a counteroffer; the original offering party may then accept it or reject it. At any time prior to acceptance, the offer may be rescinded on notice unless the offering party is bound by a separate option contract not to withdraw. Only those terms expressed in the contract can be enforced; secret intentions are not recognised. For a contract to be binding, it must not have an immoral or a criminal purpose or be against public policy.

Other criteria for the enforcement of contracts have varied. In the earliest type of enforceable promises, it was the form of the contract (e.g., a sealed instrument) or the ceremony accompanying its execution that marked the essence of the transaction; contracts not sealed or not dignified by ceremonies held a lesser status, and were therefore not always enforceable. The importance of promises in commercial and industrial society produced a new criterion, and generally a promise is now enforceable only if it is made in exchange for consideration, i.e., a payment, for some action, or for another promise. In some jurisdictions, statutes have made certain promises enforceable without consideration, e.g., promises to pay debts barred by the statute of limitations. To be enforceable, most contracts must be in writing, to comply with the Statute of Frauds.

Since a contract is an agreement, it may be made only by parties with the capacity to reach an understanding. Therefore, individuals suffering from severe mental illness are unable to make binding contracts. Until the late 19th cent., married women were also without contractual capacity, because at common law they were considered the creatures of their husbands and without wills of their own; this disability has been removed by statute universally. Minors are not bound by their contracts, but they are responsible for the value of goods received in contracts made for necessities of life. Otherwise, a minor may denounce his contracts at any time and on attaining majority may elect whether to affirm or repudiate them.

A contract must also be the un-coerced agreement of the parties; thus, if it is procured by duress or fraud it is void. A contract can be unenforceable if it is so one-sided as to be found unconscionable, where the terms are unreasonably favourable to one party; often the material that constitutes unconscionability is buried in fine print or expressed in obfuscatory jargon. Adhesion contracts, which afford no occasion for the weaker party to bargain over their terms, are often offered to purchasers of consumer goods and services, but are not necessarily unconscionable.

Setting aside the contract

There are four different ways in which contracts can be set aside. A contract may be deemed ‘void‘, ‘voidable‘, ‘unenforceable‘ or ‘ineffective’.

1. Voidness implies that a contract never came into existence.
2. Voidability implies that one or both parties may declare a contract ineffective at their wish.
3. Unenforceability implies that neither party may have recourse to a court for a remedy.
4. Ineffectiveness implies that the contract terminates by order of a court where a public body has failed to satisfy public procurement law. To rescind is to set aside or unmake a contract.

Breach of contract

Breach of contract is defined in the Unfair Contract Terms Act 1977 as:

• non-performance;
• poor performance;
• part-performance; or
• performance, which is substantially different from what was reasonably expected.

A breach occurs when a party to a contract refuses or neglect or fails to perform the obligations imposed on him under a contract. This may be done by:

• Failure to complete the contract on the date fixed.
• If he expressly repudiates the contact before the date fixed and this is called anticipated breach.
• If by his own act, he makes it impossible for the contract to be perform e.g. by transferring to another, something and he had earlier contracted to as was the case in Synge versus Synge (1894 qb 466).

Innocent parties may repudiate (cancel) the contract only for a major breach (breach of condition), but they may always recover compensatory damages, provided that the breach has caused foreseeable loss. The effect of breach is that it entitles the injured party to sue for damages, but does not always discharge the contract unless its effect shows that it is purposeless for the contract to go on e.g. if the breach affects the fundamental term of the contract.

 Termination of Contracts

Contracts may terminate in ways other than by being fully executed. If the object of the contract becomes impossible or unlawful; if the parties make a novation (i.e. a new superseding agreement); or if the death of one party prevents that party from rendering personal services he or she had agreed to perform; the contract is terminated. The injured party may also treat the contract as a nullity if the other party refuses to perform. Other vitiating factors constituting defences to contract termination include:

1. Mistake
2. Incapacity, including mental incompetence and infancy/minority
3. Duress
4. Undue influence
5. Unconscionability
6. Misrepresentationor fraud
7. Frustration of purpose

The law provides several remedies for breach of contract. The most usual is money damages for the loss incurred. In cases where some action other than the payment of money was contracted for, a court may grant the plaintiff an injunction ordering specific performance. If one party is unjustly enriched by a contract that he or she then repudiates legally, restitution may be required. A typical example of this is ordering a minor who revokes a contract to restore the things of value that were obtained.

1. Mistake

A mistake is an incorrect understanding by one or more parties to a contract and may be used as grounds to invalidate the agreement. Common law has identified three different types of mistake in contract: common mistake, mutual mistake, and unilateral mistake.

1. A common mistake occurs when both parties hold the same mistaken belief of the facts. This is demonstrated in the case of Bell v. Lever Brothers Ltd. which established that common mistake can only void a contract if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible.
2. A mutual mistake occurs when both parties of a contract are mistaken as to the terms. Each believes they are contracting to something different. The court usually tries to uphold such a mistake if a reasonable interpretation of the terms can be found. However, a contract based on a mutual mistake in judgment does not cause the contract to be voidable by the party that is adversely affected.

• A unilateral mistake occurs when only one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage of the mistake. It is also possible for a contract to be void if there was a mistake in the identity of the contracting party. An example is in Lewis v. Averywhere Lord Denning  held that the contract can only be avoided if the plaintiff can show that, at the time of agreement, the plaintiff believed the other party’s identity was of vital importance. A mere mistaken belief as to the credibility of the other party is not sufficient.

1. Incapacity

Sometimes the capacity of either natural or artificial persons to either enforce contracts, or have contracts enforced against them is restricted. For instance, very small children may not be held to bargains they have made, on the assumption that they lack the maturity to understand what they are doing; errant employees or directors may be prevented from contracting for their company, because they have acted ultra vires (beyond their power). Another example might be people who are mentally incapacitated, either by disability or drunkenness. In these cases the contract is either void or voidable.

1. Duress and undue influence

Duress has been defined as a threat of harm made to compel a person to do something against his or her will or judgment; esp., a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition. An example is in Barton v Armstrong [1976] in a person was threatened with death if they did not sign the contract. An innocent party wishing to set aside a contract for duress to the person need only to prove that the threat was made and that it was a reason for entry into the contract; the burden of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract. There can also be duress to goods and sometimes, ‘economic duress’.

Undue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person through a special relationship such as between parent and child or solicitor and client. As an equitable doctrine, the court has discretion. When no special relationship exists, the question is whether there was a relationship of such trust and confidence that it should give rise to such a presumption.

1. d) Illegal contracts

If based on an illegal purpose or contrary to public policy, a contract is void. In a case in Canadian involving the Royal Bank of Canada v. Newell, a woman forged her husband’s signature, and her husband signed agreed to assume “all liability and responsibility” for the forged checks. However, the agreement was unenforceable as it was intended to “stifle a criminal prosecution“, and the bank was forced to return the payments made by the husband. Another type of unenforceable contract is a personal employment contract; e.g. to work as a spy or secret agent. This is because the very secrecy of the contract is a condition of the contract. If the spy subsequently sues the government on the contract over issues like salary or benefits, then the spy has breached the contract by revealing its existence. It is thus unenforceable on that ground, as well as the public policy of maintaining national security (since a disgruntled agent might try to reveal all the government’s secrets during his/her lawsuit). Other types of unenforceable employment contracts include contracts agreeing to work for less than minimum wage.

e)Misrepresentation

Misrepresentation means a false statement of fact made by one party to another party and has the effect of inducing that party into the contract. For example, under certain circumstances, false statements or promises made by a seller of goods regarding the quality or nature of the product that the seller has may constitute misrepresentation. A finding of misrepresentation allows for a remedy of rescission and sometimes damages depending on the type of misrepresentation.

There are two types of misrepresentation in contract law; namely: i) fraud in the factum, and ii) fraud in inducement.

• Fraud in the factum focuses on whether the party in question knew they were creating a contract. If the party did not know that they were entering into a contract, there is no meeting of the minds, and the contract is void.
• Fraud in inducement focuses on misrepresentation attempting to get the party to enter into the contract. Misrepresentation of a material fact (if the party knew the truth that party would not have entered into the contract) makes a contract voidable. According to Gordon v. Selico, it is possible to make a misrepresentation either by words or by conduct, although not everything said or done is capable of constituting a misrepresentation. Generally, statements of opinion or intention are not statements of fact in the context of misrepresentation.

Both an order for specific performance and an injunction are discretionary remedies, originating for the most part in equity. Neither is available as of right and in most circumstances, a court will not normally order specific performance. A contract for the sale of real property is a notable exception. In most jurisdictions, the sale of real property is enforceable by specific performance. Even in this case the defenses to an action in equity (such as laches, the bona fide purchaser rule, or unclean hands) may act as a bar to specific performance. Related to orders for specific performance, an injunction may be requested when the contract prohibits a certain action. Action for injunction would prohibit the person from performing the act specified in the contract.

 f) Frustration

Frustration has been defined by Per viscount Simon in Circle Wood Property and Investment Trust Ltd. ver. Leightors Investment Trust Ltd (1945 AC 221 at pg 228) as ‘the premature determination of an agreement between parties lawfully entered into and in the course of its premature termination owing to occurrence of an intervening event or change of circumstances so fundamental as to be regarded by law as entirely beyond what was contemplated by the parties when they entered into the agreement. A contract will be frustrated if:

• There is a fundamental change of circumstances and strikes at the root of the contract and which was not contemplated by the party e.g. interference by the govt. whereby the subject matter of the contract is ceased or prohibited.
• If the performance of the contract becomes illegal by statute
• Where the subject matter gets destroyed accidentally, e.g. in Taylor V Caldwell (1863 3B NS 826) where the defendant let a music hall to the plaintiff for a period, the hall got destroyed by fire. The plaintiff sued for the breach of agreement.  It was held that the destruction of the hall terminated the contract thereby discharging it.
• If any of the parties become personally incapable e.g. in contract for personal services by death or illness
• If the whole basis of the contract is an occurrence of an event and this event does not occur.

The effect of frustration is that it terminates the contract but does not render the contract void abnitio. The original law was that the loss lay where it fell at the date of dissolution of the contract therefore:

• Money due but unpaid at the line of dissolution was recoverable
• Money not due at the time of dissolution was irrevocable
• The money already paid under the contract (e.g. deposit before its dissolution was irrecoverable by the payer.

This was the view in the case of Chandler V Webster (1904 IKB 483) but which the House of Lords held to be a worry decision. The Law Reform Frustrated Contract Act 1961 now provides that where a contract is frustrated, money paid under it may be recovered and money payable under it shall cease to be payable. However, of the payee has expended some money, he may be reimbursed. The Act does not apply to:

• A contract that provides for frustration
• A charter party
• A contract of insurance

 Remedies for breach of contract

The breach of contract or a breach of fundamental term in a contract may either have effect of discharging the contract or it will not discharge the contract but will entitle the injured the party to an action for damages. Briefly, the remedies for wrongful failure by a party to perform their obligations under a contract may include:

• Damages: Generally, damages will be awarded if the loss suffered:
• was caused by the breach; and
• is not too remote, i.e. the loss was reasonably foreseeable.

The amount recoverable is usually the amount necessary to put the party not in breach in the same position as if the contract had been performed.

• Cancellation: In addition to damages, Common Law and the Contractual Remedies Act 1979 may allow a party to cancel or affirm a contract where the breach is due to a misrepresentation.
• Specific performance: This is usually granted for breach of contracts for the sale of land or unique personal property. It is not usually granted if damages are considered an adequate remedy; if they are against or for an infant; or to enforce a contract for personal services.

Where the breach discharges the contract, the injured party may:

• rescind the contract if he so wishes, but if he opt for his rights then:
• be discharged from other liabilities
• take proceedings in equity to access his right to resign
• institute an action for an amount equivalent to the value of work done or goods supplied by him this he will be sinning on a quantum merit (i.e. suing for as much as he has burned).
• in the event of total failure of consideration, recover any money or property transferred.

 Where the breach does not discharge the contract, the injured party may:

• Sue for damages
• In certain cases, sue for specific performance
• Seek an injunction

Damages

An action for damages is the commonest form of relief given for breach of contract; it is to compensate the injured for the loss occasion by the breach. Damages may be general or consequential. General damages are those damages, which naturally flow from a breach of contract. Consequential damages are those damages which, although not naturally flowing from a breach, are naturally supposed by both parties at the time of contract formation. An example would be when someone rents a car to get to a business meeting, but when that person arrives to pick up the car, it is not there. General damages would be the cost of renting a different car. Consequential damage would be the lost business if that person was unable to get to the meeting, if both parties knew the reason the party was renting the car. However, there is still a duty to mitigate the losses. The fact that the car was not there does not give the party a right to not attempt to rent another car.

Nature of damages

• Nominal damages: if the injured party has not suffered any actual loss, although his right has been infringed by the breach, he will be awarded only nominal damages i.e. a small amount. In the case of Solomon V Pickering Coy Ltd (1962 6NLR 39) – the defendant who agree to sell palm oil in Nero York trans-ship the oil to Liverpool where he sell it. It was held that he was in breach of contract. But the plaintiff will only recover nominal damages and special damages.
• Contemptuous damages: These are awarded in contract or cases like breach of contract to marry. Only something as small as N10 could be awarded against the offender and it has the effect of vindicating the plaintiff but indicating that the action ought not to have been brought.
• Punitive or exemplary damages: This is the damages in excess of the loss actually suffered. They are normally awarded in breach of promise in case to assume the plaintiff feelings and provide.

• Compensatory or general damages: This is the actual sum necessary to compensate the injured party. With compensatory damages, there are two heads of loss, consequential damage and direct damage. They may be “expectation damages“, “reliance damages” or ‘restitutionarydamages’. Expectation damages are 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. Reliance damages are usually awarded where no reasonably reliable estimate of expectation loss can be arrived at or at the option of the plaintiff. Reliance losses cover expense suffered in reliance to the promise. Examples where reliance damages have been awarded because profits are too speculative include the Australian case of McRae v. Commonwealth Disposals Commission which concerned a contract for the rights to salvage a ship. In Anglia Television Ltd v. Reed the English Court of Appeal awarded the plaintiff expenditures incurred prior to the contract in preparation of performance.
  • Special damage: This is the amount paid as compensation beyond that for general damages.
• Liquidated damages are an estimate of loss agreed to in the contract. So that the court avoids calculating compensatory damages and the parties have greater certainty. Liquidated damages clauses may be called “penalty clauses” in ordinary language, but the law distinguishes between liquidated damages (legitimate) and penalties (invalid). A test for determining which category a clause falls into was established by the English House of Lords in Dunlop Pneumatic Tyre Co. Ltd v. New Garage & Motor Co. Ltd
• An amount of money known as penalty may also be awarded against the offender by the court.

 To recover damages, a claimant must show that the breach of contract caused foreseeable loss. Hadley v. Baxendale established that the test of foreseeability is both objective and/or subjective. In other words, is it foreseeable to the objective bystander, and/or to the contracting parties, who may have special knowledge? On the facts of this case, where a miller lost production because a carrier delayed taking broken mill parts for repair, the court held that no damages were payable since the loss was foreseeable neither by the “reasonable man” nor by the carrier, both of whom would have expected the miller to have a spare part in store.

 Specific performance

This is an equitable remedy whereby the court compels the party at fault to carry out the contract as originally agreed to. It is granted at the courts discretion. It is not available for contract for personal services and contract voidable at the instance of an infant. There may be circumstances in which it would be unjust to permit the defaulting party simply to buy out the injured party with damages. For example where an art collector purchases a rare painting and the vendor refuses to deliver, the collector’s damages would be equal to the sum paid.

The court may make an order of what is called ‘specific performance’, requiring that the contract be performed. In some circumstances a court will order a party to perform his or her promise (an order of ‘specific performance’) or issue an order, known as an “injunction” that a party refrain from doing something that would breach the contract. A specific performance is obtainable for the breach of a contract to sell land or real estate on such grounds that the property has a unique value.

Both an order for specific performance and an injunction are discretionary remedies, originating for the most part in equity. Neither is available as of right and in most jurisdictions and most circumstances a court will not normally order specific performance. A contract for the sale of real property is a notable exception. In most jurisdictions, the sale of real property is enforceable by specific performance. Even in this case the defenses to an action in equity (such as laches, the bona fide purchaser rule, or unclean hands) may act as a bar to specific performance.

 Injunction

Related to orders for specific performance, an injunction may be requested when the contract prohibits a certain action. Action for injunction would prohibit the person from performing the act specified in the contract. An injunction is an order of court prohibiting a person or its agent from doing, continuing or repeating some wrongful act or it may order a person to do some positive act to end a wrongful state of things e.g. requiring putting down a house roughly built.

• Trespass to land may be committed unawares e.g. by working across on private land believing it to be a public footpath.
• By detaching something attached to land e.g. fronts, lowers
• Entering come one’s land after and the official permission to that effect has been withdrawn
• In private permission to enter a place the person become a trespasser the moment this is revokes if the permission is revoked e.g. due to unrolling conduct
• Public licenses e.g. a right of entry to an in, if person abuses such a right, he will become interspaced.

Contract Types

Construction contract is simply mutual or legally binding agreement between two parties based on certain policies and conditions generally recorded in documentation form. The two parties involved are owner and contractor. The owner has full authority to decide what type of contract should be used for a specific facility to be constructed and to set forth the terms and conditions in a contractual agreement. For the construction work, the owner awards certain type of contract to the contractor. The types of contracts which are usually awarded to the contractor are of six types as:-

• Lump sum contract: It is a contract in which owner agrees to pay a contractor specified amount of Lump sum money after the completion of work without requiring cost breakdown. The construction manager and the owner agree on the overall cost of the construction project and the owner is responsible for paying that amount whether the construction project exceeds or falls below the agreed price of payment.
• Item rate contract: In this contract a contractor is required to quote rate of Individual Item of works in tender. This system of contract is mainly done in Railway Departments and Public Work Departments. An advantage of this contract is that thorough analysis of rates can be done.
• Lump sum and scheduled contract: This type of contract is same as Lump sum contract, the only difference is that cost breakdown is essentially required here.
• Cost plus fixed fee contract: In this type of contract, the contractor is paid by the owner an agreed amount over and above the actual cost of work.
• Cost plus percentage of cost contract: In this construction contract, a method of payment to a contractor in which an additional amount of money, expressed as a percentage, is paid by the owner over and above actual cost of work is used. When paid as a predetermined profit, the owner will usually require a strict accounting of expenses.
• Special contracts: Special contracts are further classified into five types:-
• Turnkey contract
• Negotiated contract
• Pakage contract
• Continuing contract
• Running contract

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