Understanding Contract Law: Key Elements and Implications

Posted on Nov 29, 2024 in Philosophy and ethics

Definition of a Contract and Essential Elements: A contract is a legally binding agreement giving rise to obligations, which are enforced or recognized by law. Seven Elements: A contract will be enforced when the essential elements exist:

  • Offer and Acceptance: There must be an offer by one party and an acceptance of it by the other.
  • Intention: To create legal relations.
  • Capacity: Of the parties.
  • Consent: Must be genuine.
  • Consideration: Must be present.
  • Legality: Of object.
  • Possibility: Of performance.

Name the Grounds of Invalidity That May Occur in a Contract: They make a contract invalid:

  1. Duress (coacción)
  2. Mistake (error)
  3. Misrepresentation (tergiversación)
  4. Undue Influence (influencia indebida)
  5. Illegality (ilegalidad)

Define Indirect Representation: Where an intermediary acts on instructions and on behalf of, but not in the name of, a principal, or where the third party neither knows nor has reason to know that the intermediary acts as an agent, the rules on indirect representation apply. Where an intermediary acts:

  1. On instructions and on behalf, but not in the name, of a principal.
  2. On instructions from a principal but the third party does not know and has no reason to know this, the intermediary and the third party are bound to each other.

Direct Representation: Where an agent acts in the name of a principal, the rules on direct representation apply. It is irrelevant whether the principal’s identity is revealed at the time the agent acts or is to be revealed later. When an agent is acting in the name of the principal, its acts bind the principal and the third party directly to each other. The agent itself is not bound to the third party.

Explain the General Rules of Interpretation: Three aspects for the construction (interpretation) of contracts:

  1. Determination of the Meaning: The common interpretation of the parts including the literal interpretation and particular interpretation.
  2. Intention of the Parties: If any party proposes a particular interpretation.
  3. Circumstances: If there was a term without common interpretation, the parties choose the most reasonable.

Elements to Consider in the Performance of a Contract:

  • Place of performance
  • Time of performance
  • Early performance
  • Order of performance
  • Alternative performance
  • Performance by a third person
  • Form of payment
  • Currency of payment
  • Appropriation of performance
  • Property not accepted
  • Money not accepted
  • Costs of performance

General Remedies for Non-Performance:

  1. Whenever a party does not perform an obligation under the contract and the non-performance is not excused under Article 8:108, the aggrieved party may resort to any of the remedies set out in the next chapter.
  2. Where a party’s non-performance is excused under Article 8:108, the aggrieved party may resort to any of the remedies set out in the next chapter except claiming performance and damages.
  3. A party may not resort to any of the remedies set out in the next chapter to the extent that its own act caused the other party’s non-performance.

Main Elements of Content & Effects:

  • Content and Effects
  • Statement giving rise to contractual obligation
  • Simulation
  • Determination of price
  • Unilateral determination by a party
  • Determination by a third person
  • Preference to a non-existent factor
  • Quality of performance
  • Contract for an indefinite period
  • Stipulation in favor of a third party
  • Change of circumstances

Definition of Condition: A condition is an essential term of the contract. If a condition is not performed (cumplimiento/ejecución), it may constitute a substantial breach of contract (incumplimiento) and allow the other party to repudiate the contract, that is, treat the contract as discharged (exoneración) or terminated. It may also give rise to a claim for damages. If all the conditions are performed, the contract is performed.

Definition of Fraud: A party may avoid a contract when it has been led to conclude it by the other party’s fraudulent representation, whether by words or conduct, or fraudulent non-disclosure of any information which, in accordance with good faith and fair dealing, it should have disclosed.

Definition of Contra Proferentem Rule: Where there is doubt about the meaning of a contract term not individually negotiated, an interpretation of the term against the party who supplied it is to be preferred.

Relevant Circumstances: In interpreting the contract, regard shall be had, in particular, to:

  1. The circumstances in which it was concluded, including the preliminary negotiations.
  2. The conduct of the parties, even subsequent to the conclusion of the contract.
  3. The nature and purpose of the contract.
  4. The interpretation which has already been given to similar clauses by the parties and the practices they have established between themselves.
  5. The meaning commonly given to terms and expressions in the branch of activity concerned and the interpretation similar clauses may already have received.
  6. Usages
  7. Good faith and fair dealing.

Preference to Negotiated Terms: Terms which have been individually negotiated take preference over those which are not.

Terms to Be Given (Full) Effect: An interpretation which renders the terms of the contract lawful, or effective, is to be preferred to one which would not.

Linguistic Discrepancies: Where a contract is drawn up in two or more language versions, none of which is stated to be authoritative, there is, in case of discrepancy between the versions, a preference for the interpretation according to the version in which the contract was originally drawn up.

Simulation: When the parties have concluded an apparent contract, which was not intended to reflect their true agreement, as between the parties, the true agreement prevails.

Determination of Price: Where the contract does not fix the price or the method of determining it, the parties are to be treated as having agreed on a reasonable price.

Early Performance: A party may decline a tender of performance made before it is due, except where acceptance of the tender would not unreasonably prejudice its interests. A party’s acceptance of early performance does not affect the time fixed for the performance of its own obligation.

Mistake as to Facts or Law: A party may avoid a contract for mistake of fact or law existing when the contract was concluded if:

  1. The mistake was caused by information given by the other party;
  2. The other party knew or ought to have known of the mistake and it was contrary to good faith and fair dealing to leave the mistaken party in error;
  3. The other party made the same mistake; and
  4. The other party knew or ought to have known that the mistaken party, had it known the truth, would not have entered the contract or would have done so only on fundamentally different terms.

However, a party may not avoid the contract if, in the circumstances, its mistake was inexcusable.

Vocabulary:

  • Fulfillment: cumplimiento
  • Avoidance: anulable
  • Performance: cumplimiento
  • Property: bienes/propriedad
  • Unfair Advantage: ventaja injusta
  • Currency: moneda
  • Authority: poder
  • Liability: responsabilidad
  • Principal: representado
  • Remedy: acciones/recursos
  • Witnesses: prueba testifical/testificación
  • Court: tribunal

Remedies: Remedios Enforce: Hacer cumplir Non-performance: Incumplimiento Cure: Curar Withholding: Retención Loss: Pérdida Warranty: Garantía Restitution: Restitución Damage: Daño Effects: Efectos Termination: Terminación Scope: Alcance Compliance: Cumplimiento Dealer: Distribuidor Agreed Payment: Pago acordado Assurance: Aseguramiento. Compliance: Procedimiento y buenas prácticas Effective: eficaz, efectivo Incidental Elements: elementos fortuitos Interpretation: interpretación Breach: incumplimiento Extinction: extinción Remedies: medios de tutela Non-performance: incumplimiento Warranty: garantías Liabilities: responsabilidades de facto Credit Protection: protección o defensa del crédito Evidence: pruebas (no evidencias) Lawyer: jurista

A bank lends money to a husband’s business on the strength of a charge. Parties: The parties in this case are the bank (lender), the husband (debtor), and the wife (grantor of the charge on the family home). Relief Requested: The relief requested is likely the cancellation of the charge on the family home due to its execution under duress, preventing enforcement against the wife. Legal Theories Used: The legal theories involve contract law and equity principles, particularly the doctrine of undue influence and duress, as well as the bank’s duty of inquiry. Facts: The bank lent money to the husband’s business based on a charge over the family home, signed by the wife. The husband obtained the wife’s signature through duress, and the bank did not investigate whether the wife’s consent was voluntary. Issue: The issue is whether the bank can enforce the charge on the family home given that the wife’s consent was obtained through duress. Holding: The holding is that the bank cannot enforce the charge due to its failure to ensure the wife’s consent was given freely, recognizing the wife as a victim of duress. Reasoning: The court reasoned that the bank had a duty to make inquiries about the wife’s consent, especially considering the unusual circumstances. By neglecting to confirm her independent consent, the bank failed its duty of care. Rule: A charge obtained through duress or undue influence cannot be enforced if the lender did not take reasonable steps to confirm the signatory’s voluntary consent.

A ship-owner contracts to unload the ship alongside a wharf in the Thames. Parties: The parties in this case are the ship-owner (who contracted to unload the ship) and the wharfinger (who managed the wharf and river-bed area). Relief Requested: The relief requested would likely be compensation for the damage to the ship, caused by the undisclosed ridge of rock on the river-bed. Legal Theories Used: The legal theories include contract law, particularly the implied obligations within a contract, and the duty of care owed by the wharfinger to the ship-owner. Facts: The ship-owner contracted to unload the ship at a specific wharf on the Thames, where the ship would rest on the river-bed at low tide. The ship-owner was unaware of the condition of the river-bed, which contained a hidden ridge of rock that damaged the ship. Issue: The issue is whether the wharfinger had an implied duty to warn the ship-owner of any dangers on the river-bed that could damage the ship. Holding: The holding is that the wharfinger was under an implied obligation to inform the ship-owner of known or reasonably knowable dangers on the river-bed. Reasoning: The court reasoned that the wharfinger, as the party responsible for the wharf area, had a duty to inform the ship-owner of any risks related to unloading at the wharf, especially those unknown to the ship-owner and which could cause harm. Rule: A party responsible for an area where contracted activities occur has an implied duty to warn others of any hidden dangers in that area, particularly if those dangers could foreseeably cause harm.

An employer of the private bank McJohn & Co. has instructed his employee not to accept personal cheques from Spanish customers. Parties: The parties in this case are McJohn & Co. (the employer or principal), the employee of McJohn & Co., and the Spanish tourist (the third party). Relief Requested: The likely relief requested would be either the enforcement or nullification of the transaction involving the personal cheque. Legal Theories Used: The legal theories involve agency law, specifically the authority of an employee acting as an agent of the principal and whether they can bind the principal to third parties despite specific instructions. Facts: The employer, McJohn & Co., instructed its employee not to accept personal cheques from Spanish customers. The employee disregarded this instruction and accepted a cheque from a Spanish tourist. Issue: The issue is whether McJohn & Co., as the principal, is bound by the employee’s actions in accepting the cheque, even though the employee acted contrary to direct instructions. Holding: The holding is likely that McJohn & Co. would be bound by the employee’s acceptance of the cheque if the employee acted within their apparent authority to third parties, even if this breached internal instructions. Reasoning: The reasoning is based on the doctrine of apparent authority, where a third party, in this case, the Spanish tourist, is entitled to assume that the employee has authority to accept cheques if no limitation on this authority was apparent to them. Rule: Under agency law, a principal can be bound by an agent’s actions within the agent’s apparent authority to third parties, even if the agent acted against the principal’s specific internal instructions.

An insurance contract contains a clause excluding losses caused by “floods.” Parties: The parties in this case are the insurance company (insurer) and the policyholder (insured party). Relief Requested: The policyholder likely requests compensation for losses, potentially arguing that the clause excluding losses caused by “floods” does not apply to their specific loss. Legal Theories Used: The legal theories involve contract interpretation, specifically the interpretation of exclusion clauses in insurance policies and the principle of contra proferentem (interpreting ambiguous terms against the drafter). Facts: The insurance contract includes a clause excluding coverage for losses caused by “floods.” A loss occurred, and the insurer denied coverage based on this exclusion clause. Issue: The issue is whether the term “flood” in the exclusion clause applies to the specific circumstances of the loss, determining if coverage should be denied. Holding: The likely holding is that if “flood” is ambiguous, it may be interpreted narrowly or against the insurer, depending on the specific circumstances of the loss. Reasoning: The court would examine whether the term “flood” is defined within the contract and, if ambiguous, would apply standard contract interpretation principles. If unclear, it may be construed against the insurer, as they drafted the policy. Rule: Ambiguities in exclusion clauses in insurance contracts are typically interpreted against the insurer, particularly when the term in question lacks a clear definition and could reasonably support more than one interpretation.

Mr. Garcia, a wine merchant, is in urgent need of cash. Parties: The parties in this case are Mr. Garcia, the wine merchant and seller, and Mr. Lower, the buyer. Relief Requested: The relief requested would be Mr. Garcia’s claim for the full market price, rather than the reduced price set out in the counter-letter. Legal Theories Used: The legal theories involve contract law, specifically the enforceability of side agreements (counter-letters) and the principle of actual intent in determining contractual obligations. Facts: Mr. Garcia, needing cash urgently, sells part of his stock to Mr. Lower at the market price, but they simultaneously create a counter-letter stating the actual sale price is 30% lower than market value. Mr. Garcia now wants to claim the full market price from Mr. Lower. Issue: The issue is whether Mr. Garcia can claim the full market price despite the counter-letter that specifies a 30% reduction. Holding: The likely holding is that Mr. Garcia cannot claim the full market price because the counter-letter reflects the parties’ true agreement on the sale price. Reasoning: The reasoning is that the counter-letter represents the actual agreed-upon price, and it reflects the true intent of both parties. Courts generally enforce agreements that reflect the true contractual intent, even if a separate document specifies a different amount. Rule: When a counter-letter or side agreement reflects the true intent of the parties regarding a contract’s terms, courts will usually enforce the terms in the counter-letter rather than any inconsistent terms in the main agreement.

Mr. Smith employs Mr. Garcia to spend three afternoons a week tending the garden of Smith. Parties: The parties in this case are Mr. Smith (the employer) and Mr. Garcia (the employee or gardener). Relief Requested: The relief requested is Mr. Garcia’s demand for payment in advance for his work in Mr. Smith’s garden. Legal Theories Used: The legal theories involve contract law, specifically regarding payment terms in employment or service contracts where the time for payment is not specified. Facts: Mr. Smith hires Mr. Garcia to tend his villa garden three afternoons a week. No agreement is made regarding the timing of payments, but Mr. Garcia demands payment in advance. Issue: The issue is whether Mr. Garcia has a legal right to demand payment in advance despite no specific agreement on the timing of payment. Holding: The likely holding is that Mr. Garcia cannot legally demand payment in advance, as it is generally assumed that payment for services is due upon completion of the agreed work period unless otherwise specified. Reasoning: The court would reason that in the absence of an agreed payment schedule, the common practice is to pay workers after services are rendered. Since Mr. Garcia’s employment terms do not specify payment in advance, Mr. Smith is not obligated to pay him before he completes his work. Rule: In service contracts without specified payment terms, payment is typically due after the service has been rendered, and an employee cannot demand payment in advance unless explicitly agreed upon in the contract.

Bob grants to Ann a loan of €2,000 for buying a Peugeot car. Parties: The parties in this case are Bob (the lender and secured party) and Ann (the borrower and obligor). Relief Requested: The relief requested would be the release of the security interest on the Peugeot after Ann makes a payment of €2,000, as specified by her. Legal Theories Used: The legal theories involve contract law, particularly regarding the borrower’s right to allocate payments toward specific debts when multiple obligations exist, as well as the rules governing security interests and their release. Facts: Bob grants Ann two loans: €2,000 to purchase a Peugeot and €2,500 to purchase a Ford, creating security interests in both cars. Later, Ann pays €2,000 and declares that this payment should apply to the loan for the Peugeot, thus releasing the security interest on that car. Issue: The issue is whether Ann’s designation of her €2,000 payment to the Peugeot loan is binding on Bob, thereby releasing the security interest in the Peugeot. Holding: The likely holding is that Ann’s allocation of her payment to the Peugeot loan is effective, and the security interest in the Peugeot is released, as long as Bob has no reasonable grounds to object. Reasoning: The reasoning is that, in situations where a debtor owes multiple debts to the same creditor, the debtor typically has the right to specify which debt a payment applies to. Since Ann directed her payment toward the Peugeot loan, Bob must respect this allocation, resulting in the release of the security interest on that car. Rule: When a borrower has multiple obligations to a lender, the borrower generally has the right to allocate payments to specific debts. The lender must honor this allocation, and any associated security interest on the specified debt lapses if the debt is fully satisfied.

Andrew, a contractor, promises to erect five garages and to build and pave the road leading to them for Bobby’s lorries. Parties: The parties in this case are Andrew (the contractor) and Bobby (the client or property owner). Relief Requested: The relief requested would likely be compensation or damages for Andrew’s failure to complete the paving of the road by the agreed deadline, as this prevented Bobby from using the garages. Legal Theories Used: The legal theories involve contract law, specifically breach of contract and substantial performance, as well as damages for incomplete or defective performance. Facts: Andrew agreed to build five garages and a paved road for Bobby by October 1st. The garages were completed by the deadline, but the road was only built, not paved, which prevents Bobby from using the garages as planned. Issue: The issue is whether Andrew’s failure to complete the paving constitutes a breach of contract that entitles Bobby to damages, given that the unpaved road prevents the intended use of the garages. Holding: The likely holding is that Andrew breached the contract by failing to complete all aspects of the project by the deadline, specifically the paving, which was essential for the functional use of the garages. Reasoning: The reasoning is that contract performance must satisfy all material terms, especially those necessary for the intended use of the property. Because the lack of paving hinders Bobby’s ability to use the garages, the breach is material, entitling Bobby to seek remedies for the incomplete work. Rule: When a contractor fails to fulfill a material part of the contract that prevents the owner from using the property as intended, the owner is entitled to remedies. The contractor’s failure to perform key aspects by the agreed date may be treated as a breach, permitting the owner to seek compensation for resulting damages.

Can you solve the following case? Mr. Garcia leases a house to Mr. Smith. The house suffers severely from damp but just Parties: The parties in this case are Mr. Garcia (the landlord) and Mr. Smith (the tenant). Relief Requested: The relief requested would likely be contract avoidance, allowing Mr. Smith to cancel the lease due to the concealed defect in the property. Legal Theories Used: The legal theories involved include contract law principles, specifically misrepresentation, fraudulent concealment, and the implied warranty of habitability (landlord’s duty to disclose known defects affecting livability). Facts: Mr. Garcia leases a house to Mr. Smith. The house has a severe damp issue, but Mr. Garcia conceals it by repainting the walls just before leasing, preventing Mr. Smith from noticing the defect at the time of agreement. Issue: The issue is whether Mr. Smith can avoid the lease contract due to Mr. Garcia’s concealment of a significant defect that affects the habitability of the property. Holding: The likely holding is that Mr. Smith can avoid the contract, as Mr. Garcia’s intentional concealment of the dampness constitutes misrepresentation, which materially affected Mr. Smith’s decision to enter into the lease. Reasoning: The court would likely reason that Mr. Garcia, by repainting the walls to hide the damp issue, engaged in fraudulent misrepresentation. This act deprived Mr. Smith of the opportunity to make an informed decision about renting the house. The defect impacts the habitability of the property, which is a fundamental aspect of any lease agreement. Rule: A tenant may avoid a lease contract if the landlord conceals a significant defect that affects the property’s habitability. Fraudulent misrepresentation, such as hiding defects that a tenant would reasonably rely on, provides grounds for the tenant to cancel the lease.