Contract Law and Contract Formation in Common Law

Contract Law is the body of law which regulates legal rights and remedies resulting from contracts among individuals and/or companies. Contract law is part...
General, Italian Law

Federico V

Contract Law is the body of law which regulates legal rights and remedies resulting from contracts among individuals and/or companies. Contract law is part of private law because it does not involve or bind the State or individuals that are not parties to the contract, and it covers most of the commercial transactions that take place in day-to-day life.

Contract Law governed by common law is based on case rulings (a precedent set prior court ruling) and statutory law (written laws enacted by a legislative body). For specific commercial contracts, such as those for the sale and purchase of goods, contract law may be supplemented or replaced by other laws; in the United Kingdom, the sale of goods can also be governed by the Sale of Goods Act 1979.

Contract law relies on the “mirror image rule” which is based on the requirement for an absolute and unequivocal acceptance to an offer to create a contract: acceptance must be for the exact terms and conditions and anything different constitutes a counter offer that effectively rejects the original offer.

In common law, a contract is a legally binding agreement between two or more parties enforceable in a court of law.

A commercial contract is a written or oral promise between two parties to sell or buy goods or services. There are six elements that make it a legal and binding document, which are: 1) an offer that details exactly what will be provided; 2) acceptance, which is the agreement by the other party with the offer presented; 3) consideration, money, or something of interest exchanged between the parties; 4) capacity of the parties in terms of age and mental ability; 5) the intent of both parties to carry out their promise; 6) legally enforceable terms and conditions also called the object of the contract.

A contract is enforceable when both parties agree to do or not to do something, back the promise up with money or something of value, both are of sound mind, intend to carry out their promise, and what they promise to do is within the law. Types of contracts that are enforceable are: 1) an express contract: in this contract, all elements are specifically stated. This can be written or done orally; 2) an implied in-fact contract that binds parties together through a mtual agreement and intent, but there are no expressed terms of the agreement; 3) an implied in-law contract (quasi-contract): in this type of contract, the elements are not specifically written or expressed. It is used as a remedy in a situation when one party to the contract received unjust enrichment resulting from not paying for a product or service rendered; 4) an option contract that allows a buyer and seller to enter into a contract for the sale or purchase of goods or real property but the sale is contingent upon certain terms, like timeframe or an action.

Before signing a commercial contract, the parties usually entertain a preliminary negotiation phase where they get to know one other and introduce the main elements and conditions of the future business transaction. The outcome of such a preliminary phase is the drafting of a preliminary agreement setting the scene for fruitful negotiations and business. There are two types of preliminary agreements: ones that are intended to create binding obligations on the parties and ones that are not. The most common form of this agreement is the Letter of Intent: it is a declaration of the parties at a very early stage of contract formation in order to express the intention for a later, binding agreement. The letter of intent is used to bind a party to negotiate exclusively with another party for a specified period of time. At the end of this negotiation period, the parties will either execute a binding contract or they will part ways with no further obligation to each other.

Confidentiality agreement (sometimes called a non-disclosure agreement or secrecy agreement) is a legal contract between at least two parties that outlines the obligations not to disclose and how, or how not, to use confidential material or knowledge of information that the parties wish to exchange with one another for certain business purposes but without that information becoming known to a wider audience. It is the first step to know a counterparty or potential partner. This agreement creates a confidential relationship between the parties to protect any type of confidential and proprietary information or industrial secrets. The key elements of this agreement are: 1) outlining the parties to the agreement; 2) definition of what is confidential and identifying the confidential information; 3) the exclusions from what must be kept confidential; 4) the term of the confidentiality; 5) the term the agreement is valid; 6) the obligations of ht eparties regarding the confidential information.

Exclusivity agreement is most used in cases of acquisition of businesses and interest in companies. It is usually an agreement whereby a party agrees with the other one that it will not negotiate with a third party for a specific period of time; this type of agreement imposes obligations only on one party.

In common law, a legal contract is formed when all the essential elements are present and these are: 1) offer is a promise in exchange for performance by another party and it is one of the elements that make a contract valid. An offer can be negotiated to create a counter-offer. The offer is not really an offer until it is received by the offeree and it can be revoked, or taken back, by the offeror at any time prior to acceptance; 2) acceptance is a certain willngness to accept the terms of a specific offer. If both parties give thier mutual agreement to the same terms, the contract is accepted and becomes binding. The consent or acceptance of the parties to a contract must be free, mutual, and communicated by one to the other. Acceptance is not always expressed in writing and can be implied by cinduct; 3) consideration is the price of the bargain and its essence is mutuality; 4) intention to create a legal relation: a contract cannot be legally formed without the mutual intention by the parties to be bound by the terms.

In common law, a binding contract must be in the form required by the law, and between parties with the capacity to contract or made by a representative of the contracting parties with the authority to act (for example, a representative with a power of attorney). No particular form or formalities are required to form a contract which may be made in writing, made verbally or implied by conduct or behaviour of the contracting parties. Like in the civil law, it does require that some specific agreements must be in writing to be legally binding (for example, employment contracts, real estate contracts, guarantee contracts, contracts for the transfer of shares and contracts which must be made by deed. The object of a contract must not be illegal. If the object of contract is illegal, it will not be enforceable in a court of law.

A contract may be defective and may consequently be void or voidable or unenforceable. 1) A contract may be void (no contract exist) if one, or both, of the parties is not recognised in law as having legal capacity to consent a contract; 2) a contract is voidable or cancelled by one of the parties if there is some defect in its formation; 3) a contract can be unenforceable (for example, the lapse of time may render a contract unenforceable).

A third party can neither be bound by nor enforce a term of a contract to which it is not a party (The principle of privity of contract). However there are ways in which a third party can be affected by the terms of a contract and can enforce them in a court of law: 1) a contract made by an agent on behalf of his/her principal; 2) a contract with the provision for assignment to a third party; 3) in novation of a contract where a subsequent contract between the original parties and a third party will have the effect of repacing the original contract.

The terms of contract are the rights and obbligations of the parties under the contract. In common law there is a distinction between “implied terms and express terms” and “conditions and warranties”:

Implied terms are not made express within the contract but may be implied into the contract. The possible sources of implied terms are: by custom; by statute; or by common law.
Express terms are set out and stipulated expressly in the contract.
Conditions are the fundamental terms of the contract: “the essential terms”.
Warranties are minor terms of the contract and therefore, “non essential terms”.
In case of breach of contract because if a party breaches a warranty, the innocent party may claim damages. If the breaching party has broken a condition, it gives the right to the innocent party to rescind the contract and be entitled not only to the damages but also to the remedy of rescission. There is still the possibility for the innocent party to decide to affirm the contract, so that the contract will continue to its natural end, and recover the damages for the breach.

Discharge of contract is the termination of contractual obligation and it is when the parties are released from their respective obligations. A contract may be discharged in the following ways: 1) discharge by performance where the parties have fulfilled their respective obligations and the contract comes then to a natural end; 2) discharge by express agreement where the parties agree to extinguish remaining obligations before the natural end of the contract; 3) discharge by breach where one party does not fulfil its obligations under the contract; 4) discharged by frustration of contract when after the formation of the contract some events beyond the control of the parties happen (for example: the impossibility to perform the contract; the object of the contract becomes illegal; the event prevents the main goal from being achieved; the death of one of the parties).