What is a contract?

A contract is an agreement between two or more persons (e.g. individuals, corporations, partnerships, limited liability companies or government agencies) to do, or to refrain from doing, a particular thing in exchange for something of value.

What are the key elements of a binding contract?

The elements of a contract are: (i) an agreement; (ii) between competent parties; (iii) based upon the genuine assent of the parties; (iv) supported by consideration; (v) made for a lawful objective; and (vi) in the form required by law.

Isn’t an agreement the same thing as a contract?

No, an agreement is only one element of a contract. If all six elements are not present, there is no contract.

What is an agreement then?

An agreement arises when at least one person, the offer or, makes an offer and the person or persons to whom the offer is made, the offeree, accepts. There must be both an offer and an acceptance. If either is not present, there is no agreement and therefore no contract.

What constitutes an offer?

To constitute an offer, the offeror must intend to create a legal obligation, or he must appear to intend to create a legal obliga­tion. This intent can be shown by conduct. For example, when one party signs a written contract and sends it to the other party, this action is obviously an offer to enter into a contract on the terms of the writing. Again, the offeror must intend to create a legal obligation. No contract comes into being when an offer is made jokingly, or under any other circumstances that would cause a reasonable person to believe there was no intent to enter into a binding agreement.

Do newspaper advertisements, price quotations, or catalog prices constitute an offer?

No, ordinarily these are just invitations to negotiate and cannot be accepted in a contractually-binding manner. No seller has an unlimited supply of any commodity and therefore cannot possibly be deemed to have intended to make a contract with everyone who sees the advertisement or seeks to accept the price offered.

An invitation to negotiate is not an offer. An invitation to negotiate is merely a preliminary discussion or an invitation by one party to the other to negotiate or make an offer. For example, a school asking a teacher whether or not the teacher wishes to continue teaching at the school the following year is a preliminary discussion and not an offer that could be accepted. If the teacher indicated that she would like to continue teaching, then a formal offer could be made.

Does an offer have to be in writing?

Not necessarily; but, it does have to be communicated in order to be a valid offer. The offer may be communicated by the offeror or at his direction. If the offeree hears about the offer indirectly, through the grapevine so to speak, he cannot accept the offer until it is communicated to him by the offeror or at the offeror’s direction.

Can an offer be withdrawn without incurring liability to the other party?

Yes, an offer can be withdrawn before acceptance and therefore prevent a contract from arising. If an offer is terminated, an attempted acceptance after the termination has no legal effect. Ordinarily, an offer may be revoked at any time by the offeror. All that is required is the showing by the offeror of his intent to revoke the offer and communication of this intent to the offeree.

How else can an offer be terminated?

Offers may be terminated in any one of the following ways: Revocation of the offer by the offeror; counteroffer by offeree; rejection of offer by offeree; lapse of time; death or disability of either party; or performance of the contract becomes illegal after the offer is made. The general rule is that the revocation is effective only when it is made known to the offeree. Until it is communicated to the offeree, directly or indirectly, the offeree has reason to believe that there still is an offer that may be accepted. The offeree may rely on this belief. If the offeror seeks to revoke the offer, but the offeree accepts the offer before notice of the revocation, a valid contract is created.

What is the difference between a void and a voidable contract?

A valid contract is a legally-binding contract that is made in accordance with all legal requirements. A voidable contract is an agreement that would be binding and enforceable except the circumstances surrounding its execution, or the fact that one of the parties lacks capacity, makes the contract voidable at the option of one of the parties. For example, a person who has been forced to sign an agreement against his will may avoid being bound by the agreement. A void agreement is an agreement which is without legal effect. For example, an agreement which deals with the performance of an illegal act is void

What is the “Mailbox Rule.”?

If the offeror does not otherwise specify, a mailed accep¬tance takes effect when the acceptance is properly mailed. This is known as the Mailbox Rule. If the offeror specifies that an acceptance shall not be effective until received, there is no acceptance until acceptance is received. The Mailbox Rule also would not apply in a situation where the offeror requires receipt of a payment to accompany an acceptance.

What is a counteroffer?

A counteroffer is a new set of terms and conditions given in response to the original offer. A counteroffer causes the original offer to be null and void.

What is an executory contract?

An executed contract is a contract that has been completely performed. Nothing remains to be done by either party. For example, if you go into a furniture store and agree with the sales-man to pay $200.00 for a chair and then pay the salesman cash and take delivery of the furniture, the contract has been completely executed. In an executory contract, something remains to be done by one or both of the parties. For example, suppose you and a seller signed a contract regarding the purchase of land, and you both agree that the sale will be consummated after the buyer obtains his loan and the seller gives a certificate of title (showing no defects). This is an enforceable contract, but it is said to be executory.

What is an option contract?

An option contract is a contract that gives the right to one party to enter into a second contract with the other party at a later date. One of the most common forms of option contracts deals with the sale of real estate. In this type of contract, the prospective buyer will be granted an option to purchase the property within a specified period of time. The prospective buyer will pay the seller a nonrefundable sum of money since the seller is, in effect, taking the property off the market during the option period. If the prospective buyer exercises his option during that time, a second contract is entered into regarding the sale of the property. If the option period expires, then neither party has any obligation to the other, but the money paid for the option is not returned.

What about mistakes? How does a mistake affect the enforceability of an agreement?

The agreement of parties may be affected by the fact that one or both of them made a mistake. A unilateral mistake is a mistake made by one party to the agreement. A mistake that is unknown to the other party usually does not affect the enforceability of the agreement. A unilateral mistake regarding a fact does not affect the contract. For example, if a customer orders a water-resistant coat thinking that this means waterproof, the customer cannot legally get out of the contract unless the sale was made with some sort of misrepresenta¬tion as to the meaning of those words. An exception to this would be if the seller knew that the buyer misunderstood those terms but went ahead and sold the coat anyway.

What if I sign an agreement without reading it? Does that affect the enforceability of the agreement?

A person who has the ability and the opportunity to read a document before signing it is contractually bound by the terms of the document even if the person signed it without reading it. The signer cannot avoid liability based on the argument that no explana¬tion was given to him of the terms of the contract.
Even if a person is unable to read or understand the terms of the agreement, he is still bound by the terms of the agreement since he should have tried to obtain an explanation of the agree¬ment. The exception to this rule is that if the other party knows, or has reason to know, that the signer cannot read or has a limited education, some Courts would hold that the other contracting party should have read the document to the other party or explained the terms.

What if I could not read and the explanation of the other party regarding the terms of the agreement were wrong?

If a party relies on the explanation of another party as to the contents of the agreement, the contract may be avoided under two circumstances:
1. The party was justified in relying on the explanation of the other party; and
2. The explanation was fraudulent.

The party making the explanatory statements does not have to be a lawyer but can be any person who handles these types of agreements on a regular basis and therefore has a greater knowledge of the contents than the other person. This rule would not apply if the agree¬ment were negotiated between the two parties and therefore both parties had an understanding of the terms as evidenced by the negotia¬tion. This rule is more applicable to a situation where the agreement is on a preprinted form, and the person who explains the agreement deals with these types of forms on a regular basis.

What if there is a mistake as to the legal effect of an agreement?

When parties to an agreement make a mistake as to the legal effect of the contract, the contract is still binding. For example, suppose Yusuf sold Emre a vacant lot and Emre planned to build an office on the lot. Both Yusuf and Emre assume that this would be a lawful use of the property. However, if after pur¬chasing the property and applying for a building permit, Emre is told that the property is zoned for residential use, the contract is still binding.

What does it mean to rescind a contract?

Rescission of a contract means to put the parties back in the same circumstances they were in before making the agreement. If the agreement involved the sale of goods, the goods would be returned to the seller and the money for the goods would be returned to the buyer.

What if one party to a contract knows of a fact that has a critical bearing on the transaction, but fails to disclose this fact to the other party?

Generally, the law does not attach any significance to nondisclosure. Thus, generally, an agreement of the parties is not affected by the fact that one party did not disclose information to the other party. This is the general rule. The theory is that it is preferable that the party lacking the knowledge ask questions of the party with the knowledge rather than imposing some sort of duty on the party with the knowledge to volunteer the information.

Are there exceptions to this nondisclosure rule?

Yes, in some instances, the failure to disclose information that was not requested can be regarded as fraudulent, and give the party harmed by the nondisclosure the same remedies as if a false statement were intentionally made. These exceptions fall generally into one of four categories:

• Unknown defect or condition;
• Confidential relationship;
• Fine print; and
• Active concealment.

Many courts would hold that there is a duty for one party, who knows of a defect or a harmful condition, to disclose this information to the other party if the defect or harmful condition is obviously unknown to the other party and is of a nature that the other party would be unlikely to discover or inquire about the defect or condition.

What is active concealment?

Active concealment can cause a contract to be invalid or result in liability to the concealing party. This is more than a failure to volunteer information. Active concealment consists of hiding information from the other party by concealment. For example, using the Yusuf and Emre house transaction as an example, if Yusuf had painted over the cracks in the wall and the ceiling in order to hide the foundation problem, he would be guilty of active concealment and the contract could possibly be rescinded, or Emre could possibly recover damages from Yusuf in the amount of the foundation repair costs.

What constitutes fraud and how to you prove it?

Fraud consists of five elements:

  • The making of a false statement;

  • With knowledge that the statement is false or with reckless disregard as to whether or not the state­ment is false or true;

  • With the intent that the listener rely on the statement;

  • With the result that the listener relies on the statement; and

  • With the consequence that the listener is harmed.

All five elements must be proven by clear and convincing evidence. An essential element in proving fraud is to prove that the defrauded party relied on the statement which is alleged to be fraudulent. If the alleged victim had the same knowledge of the true facts as the alleged wrongdoer, no fraud is present. If the victim should have known the facts or if a reasonable person would have known that the statement was not true, there is no fraud. If false statements are made after a contract has been signed, it is obvious that there was no reliance on the false statements and therefore there is no fraud.

What if my employer threatens to fire me if I refuse to sign the covenant not to compete?

If you do not have a contract of definite duration in time (i.e., you are an at-will employee (i.e., can be terminated at the will of your employer), the courts of many states would hold that the covenant is binding and enforceable. Your being allowed to work in the future would be the consideration. If you had another year left on a six-year contract, the employer cannot enforce a new provision, such as a covenant not to compete, unless consideration is given, such as additional compensation.

What if I were required to sign such an agreement as a condition of being hired?

If this covenant is entered into at the time the employee is employed, the promise of the employer to employ and pay compensa¬tion is consideration for the employee’s covenant not to compete

What does the element “lawful objective” deal with?

Courts will not enforce contracts that are illegal or violate public policy. Such contracts are considered void. If the illegal agreement has not been performed, neither party can sue the other for damages or to require performance of the agreement. If the agreement has been performed, neither party can sue the other for damages or have the agreement set aside. An agreement which calls for the commission of a crime is illegal and therefore void. For example, a person could not enforce an agreement with another party to burn a house down. Also, an agreement that calls for the commission of a civil wrong (such as a tort) is illegal and void. For example, an agreement to slander a third party is void.

Must a contract be in writing to be enforceable?

No – oral contracts can be just as valid and enforceable as written contracts. How­ever, the law requires that certain contracts must be in writing in order to be enforceable by a Court. The state statutes that require certain contracts to be in writing are called statutes of fraud. Statutes of fraud require that either the contract itself be in writing and signed by the parties or there must be a sufficient memorandum of the agreement signed by the party being sued for breach of contract.

Does a written contract have to be signed by both parties in order to be enforceable?

Not necessarily — The statute of frauds requires a writing to evidence the contract which must be in writing. This does not neces¬sarily have to be a formal contract signed by both parties. It can be a letter signed by only one party setting forth the terms of the oral agreement. However, the writing, whether it be a letter or memorandum, must be signed by the person “to be charged.” This means it must be signed by the person against whom you are seeking to enforce the contract. The writing must contain all of the material terms of the contract so that a Court can determine what has been agreed to.

What is the parol evidence rule?

In dealing with the statute of frauds, the first question is whether the contract is one that has to be in writing. The second question is whether or not there is a sufficient writing that can be enforced. With the parol evidence rule, there is already a written contract, and the question is whether evidence outside of the written contract is admissible in Court. If a contract is in dispute, often a question arises as to whether or not the writing evidencing the contract represents all that the parties agreed to. The general rule is that spoken words (i.e., parol evidence) will not be allowed to modify or contradict the terms of the written contract. Exceptions to this rule are made in cases of fraud, accident, or mistake, or it can be shown that the writing is not the complete or true contract.

Does a contract have to be notarized?

No. A notary public is an officer authorized by the state in which the person resides to administer oaths, take acknowledgments, and certify documents. The signature and seal or stamp of a notary public is necessary to attest to the oath of a person making an affidavit. There is a requirement that some documents be notarized, such as a real property deed in order to be recordable in the land records. However, unless specifically required by state or municipal law, a contract does not have to be acknowledged before a notary public.

If parties disagree as to the correct interpretation of a contractual term or sentence, how does a court decide upon the correct interpretation?

If there is a dispute as to the interpretation of a contract, Courts seek to enforce the intent of the parties to the contract. The intent which will be enforced is what a reasonable person would believe that the parties intended. In interpreting contracts, ordinary words are to be inter¬preted according to their ordinary meaning. Trade terms and technical terms are to be interpreted according to their trade or technical meaning. Software, when referring to a computer, does not mean something that is soft, but it means the actual program. The way parties have used terms in their prior relationships can also be used to determine what the parties meant by the words they used in a contract.

What is a condition precedent?

If an occurrence or a nonoccur¬rence of an event has an effect on the existence of a contract, the event is called a condition. A condition precedent is the occurrence of an event that precedes the existence of an obligation to perform or the existence of a contract. For example, in a fire insurance policy, there is no obligation on the insurance company to make a payment until there is a fire loss. The occurrence of such a loss is therefore a condition precedent to the duty of the insurer to make payment.

What is a condition subsequent?

The parties may agree that the contract will terminate if a particular event occurs or does not occur. Such a provision is called a condition subsequent. For example, in a contract for the purchase of land, the contract may contain a condition subsequent that cancels the contract if the zoning board turns down a buyer’s application to obtain a zoning permit to use a building for a particular purpose. The contract may state something to the effect that this contract will be void if the buyer is unable to have the property rezoned from residential to commercial within 90 days from the date of the agreement.

When is a contract deemed to have been performed or discharged?

A contract is usually discharged by performance of the terms of the agreement.
An offer to perform is a tender. If a person offers to perform the contract pursuant to its terms and the other party refuses to allow performance, the contract may be deemed discharged.

What is a tender of payment?

A tender of payment is an offer to pay the amount due when it is due, for example, on a note. The tender must be legal tender, for example, by cash, a check (if allowed), or a bank wire. A payment by a check is a conditional payment. The debt is revived if the check bounces. The payee can sue on the check or on the debt.

What does it mean when a contract states, time is of the essence?”

This phrase in effect means, “the specified time and dates in this agreement are vital and thus, mandatory.” Therefore, any delay, reasonable or not, slight or not, will be grounds for cancelling the agreement. An example of this would be in the case of the sale or purchase of perishable property or property that fluctuates rapidly in value. If a contract states that time is of the essence, but it obviously is not, courts will ignore this clause. When time is not of the essence, courts generally permit parties to perform their obligations within a reasonable time.

What is the covenant of good faith and fair dealing?

In every contract, there is an implied covenant of good faith and fair dealing. One party to a contact is under an obligation to do nothing that would interfere with the performance of the other party. If one party makes the other party’s performance impossible, the obligation to perform is discharged. For example, if a contractor refuses to allow his subcontrac¬tor access to the property where the subcontractor is to do the work, the contract is discharged as to the subcontractor. The subcontractor would have a cause of action against the contractor, but the contractor would not have a cause of action against the subcontractor.

When does a breach of contract occur?

A breach of contract is a failure to perform the contract in the manner called for by the contract. A party is entitled to contractual remedies if the other party breaches a contract.

Is resolution of disputes through Dispute Adjudication Boards (DAB) a fast track process?

The FIDIC suite of Contracts (1999 Edition) provide within clause 20 that if an Engineer’s determination is disputed, that dispute may be referred to a Dispute Adjudication Board (DAB) who will adjudicate upon it and issue a reasoned Decision within 84 days (or such other period as the parties to the Contract agree). For disputes that arise on major international projects, this can be a quick process, particularly in circumstances where complex engineering, delay or quantum issues need to be resolved. As such, parties need to be well prepared before commencing DAB proceedings in order to avoid viewing the process as “rough justice”.

Are DAB Decisions binding unless challenged in Arbitration (or the Courts)?

A DAB decision becomes final and binding unless either party issues, within 28 days, a Notice of Dissatisfaction. If a Notice of Dissatisfaction is served the Decision is binding, but not final. In practice what this means is that the benefiting Party could seek an interim award from the ultimate tribunal to give effect to the binding DAB decision (re Persero, Singapore, 2014). This position has also recently been supported in English law. In the Technology & Construction Court in England, (Peterborough City Council -v- Enterprise Managed Service (2014)) the Judge observed that there would be nothing to prevent a Court ordering specific performance of the contractual obligation. Accordingly, FIDIC contracts provide that the decisions of the DAB will have legal effect and will bind the parties to the contract – if an award is made it should be complied with. Arbitration Tribunals (or Courts), in many parts of the world will give effect to the contractual terms and will not allow parties to step aside from their original agreements. It is therefore important that a party to a FIDIC Contract prepares fully and understands its case to be submitted to a DAB.

What happens after a Notice of Dissatisfaction is issued?

FIDIC provides for a cooling off period to allow the parties to seek to achieve settlement after a Notice of Dissatisfaction has been served, but if settlement is not reached then the dispute will be decided in Arbitration (or, perhaps, litigation in a domestic Court). Parties should consider whether or not the standard terms in FIDIC provide enough time for major international companies to make the most of the opportunities provided by FIDIC to achieve settlement. It is also worth considering the distraction that the DAB process and subsequent arbitration process is likely to have on a project team during an ongoing project.

How is the DAB Formed?

The FIDIC Red Book requires that the DAB shall be appointed by ‘the date stated in the Appendix to the Tender’ – a standing DAB; whereas by comparison the Yellow Book requires that the DAB will be ‘jointly appointed’ by the date 28 days after a Party gives notice of its intention to refer a dispute to the DAB’ – an ad hoc DAB. Due consideration should be given to what best suits the project and the parties on a particular project before finalizing the contract terms and agreeing the dispute resolution provisions.

Is referring a dispute to a DAB a mandatory step?
Whether or not a party must refer a dispute to a DAB before arbitrating on that dispute may vary depending upon the applicable law. However, recent cases in Swiss and English law have clarified the position in those jurisdictions (and it seems likely will be supported in, as a minimum, most other common law jurisdictions).