What Is Business Contract

What is business contract? A business contract is a legally binding agreement between two parties for an exchange of services that are of value. For a contract to be valid, an offer must be made and accepted. Using a contract in business dealings helps ensure an agreement is acted on, insofar as a broken contract could result in a lawsuit or out-of-court settlement and the payment of damages caused by the breach. The best way to avoid a dispute or potential litigation, however, is to craft a solid agreement in which you’re confident you’ve negotiated the best terms for your business. Our whole economy is based on the freedom of individuals to contract and a system of laws that enforces contracts freely entered into. But a lot of people may not be aware of what are the essential elements required to make an enforceable contract. Recently I was asked if a contract not in writing is binding. We are so familiar to seeing contracts in writing that many people suppose that a contract must be in writing (and lengthy) before it is enforceable. Essentials of contract:Agreements and contracts are two different things. It is important to know first what represent a contract and what represent an agreement. We will then study which agreements are contracts, their distinction different types of agreements and contracts. Essentials Elements of a Valid Contract: •

Proposal and acceptance

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Consideration – lawful consideration with a lawful object

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Capacity of parties to contract – competent parties

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Free consent

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An agreement must not be expressly declared to be void.

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Writing and Registration if so required by law

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Legal relationship

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Certainty

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Possibility of performance

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Enforceable by law.

There are three essential elements of the contract offer/ proposal and acceptance, consideration and the intention of the parties to create legal relations. Agreement: The first essential element of binding a contract is agreement. Agreement = proposal + acceptance. When one person signifies to another his willingness to do or withdraw from doing anything with a view to obtaining the agreement of that other to such act or moderation he is said to make a proposal. The first step towards creating a contract is that one person shall show or make a proposal or offer to the other, with a view to obtaining the acceptance of that another person to whom the offer is made. A proposal when accepted becomes a promise. When the person to whom the proposal is made indicates his assent there of the proposal is said to be accepted. A proposal when accepted becomes a promise. The offer is terminated and no longer opens for the acceptance in the following situation. •

Rejection by offeree

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slide of time

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Revocation by the offeror

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failure of a conditions to which the offer was subjected

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death of one of the parties

The acceptance must be unqualified agreement to all the terms of the offer. It may be by the express words or conditional from behavior. In force does not involve acceptance. Consideration: It is also one of the elements of the contract. “a valuable consideration in the sense of the law may consists either in some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given suffered or undertaken by the other” Consideration may be executed (an act in turn for a promise) or executory (a promise in return for a promise). It may not be past, unless one of three recognized exceptions applies. When at the desire of the promisor the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or to abstain from doing something such act or abstinence or promise is called a consideration for the promise. Every contract consists of two parts - (1) Promise and (2) Consideration for the promise. A promise is often made in return for a promise for example a buyer realizes the goods for the

price. Price for goods is therefore, consideration here. Consideration is the cause of the promise. It is the most essential element of the contract. As a general rule, agreement without consideration is void. The promise for a promise in return is consideration. Illustrations: A agrees to sell his house to B for Rs 10,000. Here A’s promise to sell his house is for B’s consideration to pay Rs 10,000. Similarly B’s promise to pay Rs 10,000 is for A’s consideration to sell his house to B. An agreement is a contract, only if it is made for a lawful consideration and with a lawful object. The consideration or object of an agreements is unlawful if — (1) it is forbidden by law; or (2) is of such a nature that, if permitted it would defeat the provisions of any laws (3) is fraudulent; or (4) involves or implies injury to the person or property of another (5) 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 if which the object or consideration is unlawful is void. Intentions to the legal contract: An agreement is not binding unless the parties intend to be bound by it. Legal relations are not normally intended in domestic situations (although there are exceptions to this). Legal relations are presumed to be intended in commercial agreements, unless clearly indicated otherwise. Contractual Capacity: The minimum mental capacity required by law for a party who enters into a contractual agreement to be bound by it. Common law recognizes three classes of persons who are generally not considered to have sufficient capacity to be bound by their contracts: Minors: In virtually all states, unmarried persons under the age of eighteen (18) are permitted to enter into any contract an adult can, provided that the contract is not one prohibited by law for minors (e.g., agreement to purchase cigarettes or alcohol). However, unlike those entered into by adults, contracts entered into by minors are generally voidable by the minor. Mentally Impaired or Incompetent Persons: Like-wise, contracts entered into by persons who are, at the time of contracting, intoxicated (voluntarily or not) or mentally incompetent are generally voidable.

Unlike a void contract, which is unenforceable on its face, a voidable contract is presumed to be enforceable but for the presence of some factor – here, the contractual capacity of one of the parties – which permits a party lacking capacity to avoid his or her otherwise valid contractual obligations. Insane Persons: The law presumes that persons who are legally adjudicated to be insane lack the capacity to make contracts; hence the contracts of such persons are void. In this way incompetents are protected from persons who attempt to take advantage of them. A guardian must act for such a person if he or she wishes to make a contract. An insane person may not be able to escape a contract if its terms are fair and if the other party did not know he or she was contracting with an insane person. Intoxicated Persons: A contract is voidable if one of the parties making it is so intoxicated that he or she cannot know the terms of the contract or cannot know that he or she is making a contract. Intoxication may result from the use of drugs or alcohol. A person who was intoxicated when making may nullify the contract at any time within a reasonable period after becoming sober. Failure to act within a reasonable time constitutes a ratification of the contract. A contract of a person who was intoxicated at the time contract was made is not voidable if he or she was aware of making a contract and understood its terms and consequences. Circumstances in which the Contract is affected Almost every act performed by an individual or by a firm involves a contract. Individuals and firms make contracts when they need something from another person or entity to fulfill some objectives. Contract is an important issue in our whole life and especially in business. There are different circumstances in which a contract is affected, these are following. Misrepresentation: A misrepresentation is a statement of fact which is untrue, made by one party to other before the contract is made and an inducement to the party misled actually to enter into the contract. In order to analyze a statement may be misrepresentation, it is first of all necessary to decide whether it could have been a representation at all.  A statement of fact is a representation.  A statement of law, intention, opinion or mere sales talk is not a representation.  Silence is not usually a representation.

Misrepresentation actually affects a contract because if one party can not understand the other’s opinion, it can affect the terms and conditions of a contract. Therefore it is very important to avoid misrepresentation in a contract. Types of Misrepresentation: Basically there are three types of misrepresentation, these are following. 1. Fraudulent Misrepresentation: Fraudulent Misrepresentation is a statement made with knowledge that is untrue or without believing it to be true or recklessly careless whether it is true or false. This type of misrepresentation has a great impact on the contract because the information provided by either party are not true which affects directly the terms and conditions of the contract. 2. Negligent Misrepresentation: Negligent Misrepresentation is a statement made in the belief that is true but without reasonable grounds for that belief. This type of misrepresentation has also a great impact on the contract because the information provided by either party may be true or false which affects directly the terms and conditions of the contract. 3. Innocent Misrepresentation: Innocent Misrepresentation is a statement made in the belief that it is true and with reasonable grounds for that belief. Misrepresentations in contract have a great impact on it, and it can lead a contract to breach or violation from any party. Remedies for Misrepresentations: Remedies are act of correcting an error or a fault which occur due to misrepresentation in a contract. One of the main remedies for representation, regardless of the type, is rescission. This entails setting the contract aside as if it had never been made. The principle seeks to ensure that the parties are restored to their original position, as it was before the contract was made. Remedy for Fraudulent Misrepresentation:

In case of fraudulent misrepresentation the party misled may, under common law, rescind the contract and refuse to perform his or her part of it or recover damages for any loss by a common law action for deceit. Remedy for Negligent Misrepresentation: In case of negligent misrepresentation the party misled may, under equitable principles, rescind the contract and refuse to perform his part under it. In order to gain a remedy, the claimant must show that the misrepresentation was in breach of duty of care which arose out of a special relationship. Remedy for Innocent Misrepresentation: In case of innocent misrepresentation the party misled may also, in equity, rescind the contract and refuse to perform his part of it. He or she is not ordinarily entitled to claim damages for any additional loss. 1. The most extensively held misapprehensions about the contract are that they have to be in writing and signed by the both parties. Writing makes it easier to prove the content of the contract, but it is not usually necessary unless related to one of the following;  Some contracts must be by deed.  Must be in writing  Must be evidenced in writing MISTAKE: There are many types of mistake in the contract law, some important are as under; Operative mistake Mon-operative mistake Equitable relief’s for mistake The operative mistake are further classified as 

Common mistake- there is complete agreement between the parties but both are equally mistaken as to some fundamental point.

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Mutual mistake- each believes that the other agrees with him and does not realize that there is a misunderstanding

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Unilateral mistake- one party is mistaken and the other is aware of it.

This is equitable remedy which is available when a contract is voidable. A different type of relief- rectification – may be claimed when the document does not correctly express the common intentions f the parties. Mutual contract occurs where the parties, without realizing it are at cross-purposes. Unilateral mistake arises where one party is mistaken and other is aware if it. Non-operative mistake is unless unfair; a party who has made a non-operative mistake must abide by his contract. The equity will some time imposed on the parties. Specialist terms contained in the Contract There are many specialist terms which are used in contract law, these are given below. Force Majeure: Force Majeure clauses are inserted into contracts, sometimes as a matter of routine, when the parties can foresee that diffulties are likely to arise but the parties cannot foresee their precise nature or extent. Force Majeure clauses are also referred to as hardship clauses. The subject matter of Force Majeure clauses can range from the effect of an engineering component being unavailable, so that a contract cannot be completed in its current form. Price Variation Clauses: Once a contract has been established, any change to the contract can only be achieved if both of the parties provide some form of fresh consideration, effectively therefore making an additional contract on top of the one which already exists. However some contracts may include in them a clause stating that the price may be varied, and if this were in itself a contractual term, it would be valid. This type of clause is especially likely where the subject of the contract is some commodity whose price fluctuates, such as sugar etc. Retention of title clauses: The terms of retention of title clause provide that where goods are sold, the seller can retain title to the goods until he is paid for them by the purchaser. The seller retains legal title even where possession of the goods posses to the seller. The advantage of this is that if the purchaser becomes insolvent, or for some other reason does not pay, the seller can recover the goods.

The goods once recovered, may not be in as good condition as they were at the time of sale, and hence not worth as much, but it does give the seller some protection against losing all the value of his goods. Liquidated damages clauses: To avoid calculations or disputes later over any amount payable, the parties may include in their contract a formula, liquidated damages for determining the damages payable for breach. In construction contracts it is usual to provide that if the binding contractor is in breach of contract by late completion a deduction is to be made from the contract price, the formula will be enforced by the courts if it is a genuine pre-estimate of loss. Exclusion Clauses: In the contract if the parties negotiate their contract from positions of more or less equal bargaining strength and expertise, neither the courts nor parliament have usually interfered. But there has been strong criticism of the use of exclusion clauses in contracts made between manufacturers or sellers of goods or services and private citizens as consumers. In such cases there may be great inequality. The seller puts forward standard conditions of sale which the buyer may not understand and must accept if he wishes to buy. In those conditions the seller may try to exclude or limit his liability for failure to perform as promised for breach of contract or negligence. Use of Specialist terms in Examples of cases The specialist terms involved in contract are used in examples of cases as following. Example of Retention of title clauses Aluminum Industrie Vaassen BV v Romalpa Ltd 1976 Romalpa purchased aluminum foil on terms that the stock of foil should be the property of the Dutch supplier until the company had paid to the supplier all that it owed. Romalpa got into financial diffulties and a receiver was appointed. The receiver found that the company still held aluminum foil and proceeds of selling other stocks of foil, and had not paid its debt to the supplier. The receiver applied to the court to determine whether or not the foil and the cash were assets of the company under is control as receiver.

Held: The conditions of sale were valid. The relevant assets, although in the possession of the company, did not belong to it. The receiver could not deal with these assets since his authority under the floating charge was restricted to the assets of the company. Example of Liquidated damages clauses Bridge v Campbell Discount Co 1962 The facts: A clause in a hire purchase contract required to debtor to pay on termination, a sum which amounted to two thirds of the HP price and additionally to return the goods. Held: This was a penalty clause and void since the creditor would receive on termination more than 100% of the value of goods.

Example of Exclusion Clauses: Chapelton v Barry UDC 1940 There was a pile of deck chairs and a notice stating “Hire of chairs per session of three hours”. The claimant took two chairs, paid for them and received two tickets which he put in his pocket. One of the chairs collapsed and he was injured. The defendant council relied on a notice on the back of the tickets by which it disclaimed liability for injury. Held: The notice advertising chairs for gave no warning of limiting conditions and it was not reasonable to communicate them on a receipt. The disclaimer of liability was not binding on the claimant. General Information about the Banking Court Banking court is normally dealing with cases related to financial frauds and other problems related to finance. In any organization if any one does some thing wrong about finance e.g. fraud etc, then the organization can admit a case against him or her in the banking court. For example, bank fraud is the use of fraudulent means to obtain money, assets, or other property owned or held by a financial institution. In many instances, bank fraud is a criminal offense, therefore if any employee of the bank go for bank fraud, then the bank can go to banking court for admitting a case against the employee. All the organizations deal their financial cases in the banking court. These organizations include leasing companies, banks, and other industries etc. The banking court has their own judges for hearing all the cases and they give the final Judgment after hearing all the case in detail.

In banking court both the plaintiff and defendants have the right of appeal and they can go to higher courts for further dealing of cases. Banking courts mostly situat in all the big cities of a country for dealing all the cases related to bank fraud, financial fraud in industries or any problem regarding finance in the organizations.