Principles of Accounts

Topic: Contracts
Notes
Introduction
Businesses engage in conceptual relationships with suppliers and customers regularly. As, such,
contract law is of paramount importance to its operations.
Concept and Characteristics of a Contract
A contract is a legally enforceable agreement between tow or more parties. A contract may be
written, verbal or even implied. There are several elements that go into making up a contract.
These includes:
 Offer
 Acceptance
 Consideration
 Intention to create legal relations
 Capacity
Offer
When various parties choose to enter into a contract, the first thing that occurs is an offer. An
offer is an indication by one party of their willingness to enter into a contract on the terms that
he/she has put forward. The person making the offer is called the offeror. The person to whom
the offer is made is offeree.
An example of an offer is Farmer Chris proposing to sell 100 pounds of tomatoes at $5.00 per
pound to Tara’s Mini Mart in April.
Offers can come in various forms which include: a letter, a fax or email, a conversation or even
someone behaviour. An offer may be express (verbal or written) or it may be implied.
There are numerous ways an offer can be terminated:
Mean of Termination of Offer Explanation
Rejection by the offeree The offeree does not accept the offer made by the
offeror
Death of either party Either the offeror or offeree dies
Insanity of either party Either the offeror or the offeree is deemed to be of
unsound mind
Destruction of key element required The item of consideration may be destroyed. If
for performance of the contract Farmer Chris’s farm has been destroyed due to
flooding, his offer to supply tomatoes can be
terminated since his crop would have been
destroyed
 Counter offer
Expiration of the specified time
Revocation of the offer
An alternative offer or counter offer terminates the
original offer
The time given for acceptance or reasonable
amount of time for acceptance has elapsed
The offeror withdraws the offer before it has been
accepted.

Acceptance
Acceptance occurs when the offeree agrees to the offer, thereby committing themselves to the
contract. In order for acceptance to occur, the offeree must accept or agree to the specific terms
of the offer made. A counter offer is not considered to be acceptance.
For example, if Tara, the owner of Tara’s Mini Mart, accept Farmer Chris’s offer as is, then this
is considered acceptance.
However, if Tara responds to the offer made by saying that she is willing to purchase 150 pounds
of tomatoes instead at $4.00 per pound from Farmer Chris in April, this is not considered
acceptance, since it is a counter offer. A counter offer terminates the original offer and is
therefore a new offer.
Acceptance must be communicated to the offeror before it can take effect. In some cases, the
offeror states how acceptance must be communicated. Communication of acceptance may be
written, verbal or by performance/conduct.
Consideration
Consideration is the term given to what is being done/given (or not being done) as a benefit/item
of exchange in the contract. Generally, consideration takes the form of goods, services or money.
Consideration is something given in exchange for a promise. Both the money Farmer Chris will
receive from the sale and the tomatoes (goods) Tara will receive are consideration.
Every contract must have consideration. Consideration cannot be in the past, for example
something already done. The court is not concerned with whether consideration is deemed
adequate by each party.
Invitation to treat
An invitation to treat is an announcement of willingness to enter into negotiations. It is not an
offer and therefore cannot be accepted to form a contract. Examples of invitation to treat are:
o A catalogue or price list
o A display of goods for sale with prices
o Advertisement of goods for sale with prices
o An offer to the public asking them to subscribe for shares in a company
o Tender
o Auction
Intention to create a legal relation
An agreement will not be a building contract unless it can reasonably by regarded as having been
made in light of legal consequences.
Intention to create legal relation means the readiness of a part to accept the legal consequences of
having entered into a contract, especially if they do not complete their part of the deal. Examples
of legal consequences are fines and payment of compensation for non- performance of a
contractual obligation.

Capacity
Individual entering into a contract must have legal capacity, meaning they must be able to
understand the agreement and the consequences of their actions. However, some people do not
have legal capacity:
1. Minors (persons under 18 years of age): There is a need to protect minors from their own
immaturity and lack of experience. However, minors are not prohibited from entering
into contracts for necessaries. Necessaries refer to goods needed for survival such as
food, clothing and housing.
2. Insane persons/intoxicated persons: Persons who are not considered to be of sound mind
due to a mental illness or due to drunkenness cannot enter into a contract since they are
unable to appreciate the transaction they are agreeing to. Intoxicated persons may,
however, still enter into a contract for necessaries: goods needed for survival such as food
and clothing.
3. Persons under duress: In cases where persons have been threatened or forced to enter an
agreement, the contract is not valid, since acceptance is not of free will. Foe example,
someone held at gunpoint or coerced into consent cannot be held accountable for the
obligations of that agreement.

Simple contracts and specialty contract

Simple contracts are all contracts except contracts of record and made by deed. Simple contracts
refer to the legally binding agreements made between two or more parties to do something or not
to do something in exchange for consideration. Simple contracts may be express (verbal or
written) or implied – they need not be, and usually are not, in writing.
A contract made by deed is called a specialty contract. Generally, it is written, signed in front of
a witness, sealed and delivered. However, in some countries, sealing and delivery are no longer
required.
 Void and Voidable contract
A contract is said to be void if it does not meet all the requirements of a valid contract. It is null
or invalid and therefore is not a legally binding agreement, which means it cannot be upheld by
law. A contract will be void if it involves a component that is illegal (e.g. prostitution and certain
drugs like marijuana).
A contract is said to be voidable when all elements of a valid contract are present but one party
may dispute the contract on the basis of misrepresentation, duress, or undue influence. The
innocence party has the right to reject the contract if he/she chooses. If the innocent party decides
to proceed with the contract, then it becomes legally binding.
There are three main sets of circumstances in which a contract is voidable:
1. Misrepresentation: A statement made by one party that is not true. The statement must be
material or significant to be deemed as misrepresentation. Misrepresentation may be
innocent, which is made in belief that it is true, or it can e fraudulent, that is with
knowledge that it is untrue. Misrepresentation may also arise from silence, meaning
failure to disclose the information.
2. Duress- A contract can be voidable if persons have been threatened or forced to enter an
agreement.
3. Undue influence – A contract can be voidable if one party used persuasive or pressure to
influence the other party’s decision to enter into agreement. Undue influence does not
involve force or threat a with duress but is persuasive enough to affect the party’s
decision to enter into agreement.

Discharge/Termination of Contracts
Discharge of a contract refers to the contract’s termination or dissolution. Various circumstances
can lead to the discharge of a contract such as:
 By performance: both parties have fulfilled their contractual obligations.
 By beach of contract: when one party fails to perform a contractual obligation. It can be
non-performance, defective performance or late performance. Breach of contract allows
the affected party to claim for damages and sometimes to terminate the contract.
 By agreement: Both parties mutually agree to end the contract before obligations are
performed or before obligations are performed completely.
 By frustration – When a contractual obligation cannot be performed, due to
circumstances beyond the parties’ control. If an earthquake or hurricane damages a venue
that has been contracted for a wedding, the contract will be discharged because of
frustration – the supplier is unable to fulfil the obligation due to an unforeseen
circumstance.
 Lapse of time
 Death
Remedies for breach of contract
There are a number of ways that affected parties can seek remedies for breach of contract:
Remedies for Breach of Explanation
Contract
Damages The affected party can sue for damages:
loss of income etc.
Specific Performance The court can order that the party fulfil
its contractual obligation to do something
by enforcing an order for specific
performance
Injunction The court ca order that the party fulfil its
contractual obligation to not do
something by enforcing an injunction
Restitution The innocent part can claim for recovery
of money paid and/or recovery for
services rendered to as to restore his/her
financial position.
 Class Activity
Answer all the questions carefully
a) Outline the term ‘contract’. (2marks)

b) Outlie EACH of the following features of a contract

i. Offer and acceptance (2 marks)

ii. Consideration (2 marks)

c) Distinguish between a ‘simple contract’ and a ‘specialty contract’ and give ONE example

of EACH type of contract. (6 marks)

d) State TWO ways in which contracts may be terminated. (2 marks)

e) Explain TWO circumstances under which a contract might be rendered invalid. Use

examples to support your answer. (6 marks)