Contract: What Constitutes A Binding Contract

Contract: What Constitute a Binding Contract

Contract : What Constitutes A Binding Contract. 

By Barr. Nneoma Grace Ogbah

 

Contracts are promises that the law will enforce. It is any legally binding agreement put in writing or spoken words, which governs the rights and duties among the parties involved. A contract is only enforceable when it meets the requirements of applicable laws. See the case of Enemchukwu v. Okoye [2017] 6NWLR (Pt. 1560) 37at 55-56CA. and Akinyemi .v. Odu’a Investment Co.Ltd.

A contract typically involves the exchange of goods, services, money, or a promise of any of those. In the event of a breach of contract, the injured party may seek judicial remedies such as damages, specific performance or cancellation. Contracts can either be made orally or in written form. This will bring us to the various classifications of contracts viz;

  1. Formal contract
  2. Simple contract
  3. Express and Implied contract

FORMAL CONTRACT:

A formal contract requires a signed document in addition to verbal consent. This type of contract requires a special form in order to be enforceable. Another name for formal contract is contract under seal or deed. This type of contract is executed and given full legal effect by the signing, sealing and delivering of it by the party executing it. See the case of Awojugbagbe Light Ind. Ltd .v. Chinuawe

The seal is the most important feature oga formal contract and is usually useful mostly on land matters.

SIMPLE CONTRACT:

A simple contract can be either in written form or oral form. Only a person who has furnished consideration can enforce a simple contract. Unlike a formal contract, a seal is not involved. That seems to be be the major difference between the former and latter.

EXPRESS AND IMPLIED CONTRACT:

An express contract is one in which the terms of the agreement are fully and explicitly stated; orally or in writing, whereas, an implied contract is one formed wholly or in part by conduct of the parties. The case of Brodgen.v. Metropolitan Railway co. explicitly portrayed how an implied contract operates.

In the above case, the defendant was held to have entered into a contract with the plaintiff, despite the fact that the defendant failed to sign the document containing the contract.

Before a valid contract can be said to have come into existence, it must be proven that the following exists;

  1. Offer
  2. Acceptance
  3. Consideration
  4. Consensus ad idem
  5. Contractual capacity

A party must first of all offer to enter into an agreement, and the other party must accept the terms of the offer, there must be something of value received or promised, to convince a party to agree to the deal, both parties must be competent to enter into the agreement and the agreement must be in whatever form (e.g., written, under seal, etc.) the law requires.

Just as there is the freedom to contract, there is also the freedom to bargain, which involves negotiations from both parties. This stage is very necessary as it allows for the meeting of the mind ( consensus ad idem ) of the parties.

The celebrated case of Bilante Nigerian Ltd .v. Nigerian Deposit Insurance shows how important consensus ad idem is in a contract agreement. The court in the above case stated thus;

“ in contract between parties, there must be a meeting of the mind often referred to as consensus ad idem…”

Parties to a contract are at a liberty to determine the terms of their contract. See the case of Nigerian Ports Authority plc .v. Lotus Plastic Ltd &Anor.

The law also provides for the sanctity of contract. This is to show that contracts are meant to be respected. A breach of contract attracts punishment of specific performance or awarding of damages to be paid by the one who breaks the terms of the offer.

INVITATION TO TREAT:

Most times, we mistake an invitation to treat to be an offer because the both have things in common. The difference between both terms is a thin line and usually constitutes confusion. It is not every communication that indicates a willingness to enter into an agreement that would qualify as an offer. For an offer to germinate into a binding contract, it must be definitely clear and final.

Thus, an invitation to treat can be said to be a statement or gesture which has the appearance of an offer but does not properly so qualify as an offer. It is merely a preliminary move in negotiations which may lead to a contract; an inchoate offer and as such, cannot be accepted so as to create a binding contract. See the case of BFI Group Corporation .v. Bureau of Public Enterprises (2012) 18 NWLR (pt. 1332) 209,246.

An offer must be clear, direct and must inherently elicit the intention of the offeror to be bound once it is accepted by the offeree. On the other hand,an invitation to treat is devoid of these peculiar characteristics. It merely constitutes an invitation to negotiate, or simply a request on the person to whom it is made to make an offer.

The Court of Appeal in the case of Amana Suits Hotels Ltd .v. People’s Democratic Party (2007) 6

NWLR (pt.1031)453, per Aboki, J.C.A had this to say concerning offer and acceptance;

“ For an offer to be capable of becoming binding on acceptance, it must be definitely clear and final. If it is merely a preliminary move in negotiations which may lead or may not lead to a definite offer being made by one of the parties to the negotiation, then it is not an offer but an invitation to treat”.

An offer can be revoked any time before acceptance. When this happens, there’ll be no liability on the part of the offeror, even if he promises to keep the offer open for a specific period of time. As long as the offer isn’t backed up with any form of consideration from the offeree, such offer is not binding.

TERMINATION OF CONTRACT:

Terminating a contract means legally ending the contract before both parties have fulfilled their obligations under the terms of the contract. There are a variety of reasons why a party can terminate a contract. When and how the contract is terminated will determine whether either party has any liability for breach of the contract before it was terminated.

After a contract is terminated, the parties to the contract do not have any future obligations to each other. However, one or both parties might be liable for breach of the terms of the contract prior to termination. The terms of the contract might also determine what happens after the contract is terminated.

In the absence of language in the contract that states what will happen if the contract is terminated, the parties have the option to seek a legal remedy for any breach. There are several legal remedies available when there has been a breach of contract.

Parties to a contract can legally terminate their agreement for several reasons viz:

  1. Impossibility of Performance:

If it is impossible for one or both parties to fulfill their obligations, the contract can be terminated. It must be impossible for anyone to perform. This is called objective impossibility. If someone else could perform the duties in the contract, there is no impossibility. This can also be called “termination on the basis of act of God”.

  1. Fraud,Misrepresentation, or Mistake:

If the contract was formed under circumstances that constitute fraud, misrepresentation, or mistake, the contract can be terminated. In this situation there could not have been a “meeting of the minds” on the terms of the contract because the true facts were not known to the parties.

Illegality. In some cases the subject of the contract may become illegal because a law was passed after the contract was formed. This “supervening illegality” means the contract cannot be legally performed and can be terminated.

  1. Prior Agreement:

The parties may agree to allow termination under certain specific circumstances. Those specific conditions must exist or else there is a breach of the contract. This prior agreement is a termination clause and is enforceable as long as both parties agreed to its terms.

ROLES OF LAWYERS IN CONTRACT AGREEMENT:

Before venturing into a contract, it is advisable that you consult the services of an experienced legal practitioner to help you draft the agreement and on the part of the other party, to help you peruse through what you are going into to avoid being tied down by clumsy clauses in your contract agreement. The importance of lawyers also extends to resolving any dispute that may arise during the performance of the said contract and representing you in court if a lawsuit arises out of termination of the said contract.

Terminating a contract might relieve you of further obligations under the agreement, but could leave you vulnerable to legal action for breach of contract.

REMEDIES FOR BREACH OF CONTRACT:

As earlier stated, the law provides for the sanctity of contract. A breach of contract attracts certain punishments, which are dependent on the level of breach. Some of these remedies include:

  1. Rescission
  2. Damages
  3. Specific performance
  4. Quantum meruit
  5. Injunction

RESCISSION:

Rescission allows a non-breaching party to cancel the contract as a remedy for a breach. Rather than seeking monetary damages, the non-breaching party can simply refuse to complete their end of the bargain. This remedy puts the parties back in the position they would have been in had they never entered into the contract.

However, to justify rescission, the breach must be material. That means that it has to go to the heart of the contractual agreement.

SPECIFIC PERFORMANCE:

Specific performance is a type of remedy for breach of contract in which a court orders the breaching party to perform their end of the bargain.

Monetary damages are typically favored over specific performance as a remedy for breach of contract. However, specific performance may be available when monetary damages won ’ t adequately compensate you. Monetary damages usually apply to a contract for something that is unique and can’t be easily replaced.

INJUNCTION:

Injunctions serves a similar purpose as specific performance. The difference is that with specific performance, the court orders a party to do something, but with an injunction, the court often orders a party not to do something.

An injunction may be permanent or temporary. Temporary injunctions are often ordered while litigation is pending to prevent potential damage. For example, in a lawsuit that concerns a breach of a noncompete contract, a court might order the defendant to cease the allegedly competitive activity until the lawsuit is resolved. A permanent injunction, as the name suggests, is permanent.

A judge may issue a permanent injunction as part of their final ruling in a lawsuit.

QUANTUMMERUIT:

Quantum meruit is a Latin phrase meaning “what one has earned”. In the context of contract law, it means something along the lines of “reasonable value of services”.

A claim in quantum meruit is usually an action to recover the reasonable value of services rendered by one party to another. It is an alternate remedy to an action on a contract which can be brought for partial performance. A claim in quantum meruit can at best be described as residual equity.

Procedurally, quantum meruit is the name of a legal action brought to recover compensation for work done and labour performed, firstly, “where no price has been agreed.” and secondly as an equitable compensation or restitution. In a claim of quantum meruit, the plaintiff does not seek a precise sum of money, nor a sum representing the general damages incurred by the plaintiff as a consequence of some unjust act on the part of the defendant, but a sum which will provide the plaintiff, the value of what the plaintiff has done for the defendant, usually calculated in terms of the market price or value of those services.

DAMAGES:

Damages are the most popular form of remedy in an action for breach of contract. It is aimed at placing the injured party in the position he would’ve been in if the contract was fully executed. There are various types of damages but for the purpose of contract, we will only be looking at compensatory damage and punitive damage.

Compensatory damages are awarded in an attempt to put the innocent party in the position they would have been in if the contract had been performed. Usually that means awarding the innocent party an amount of money that gives them the “benefit of the bargain” or allows them to enter into an agreement with someone else for the same service. Punitive damage on the other hand might be awarded to punish the breaching party, but are much less common.

Why do we need laws to guide our contracts in Nigeria?

It is not every type of agreement or promise that the law recognizes or treats as binding on the parties. It is only agreements that involve some sort of exchange (either of promise or performance) that are accorded legal recognition as contract. It is very important that a party who enters into a contract on his own free will gets all the assurance he can get.

Where parties to an agreement are allowed to freely renege on their avowed commitments, then the human society will become entrapped in incessant strife, anarchy and chaos. Unending chasm would be the order of the day and the world will be a very terrible place to stay. It is however, very important that the law maintains a certain level of balance when people freely go into the exchange of certain categories or promise, to ensure that parties involved in such agreements keep to their promise or pay for compensation if they fail.

It cannot be overemphasised that the law plays a very great role in contracts, so as to regulate and ensure that those involved would keep to the agreement.

 

Barr. Nneoma Grace Ogbah

Legal officer, DITOIL Energy ltd.

Phone no:  08119690931, 08106472510

Email:ogbahgrace994@gmail.com

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