Types of Contract – SS3 Commerce Lesson Note (First Term)

A contract is an agreement between two or more parties that creates legal rights and obligations between them.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Define a contract and give examples of parties to a contract.
2. State the six essential elements of a valid contract.
3. Name the classes of persons who cannot enter into a valid contract.
4. Distinguish between types of contract, such as void and voidable, express and implied, and executed and executory.
5. State the ways in which a contract is discharged (determined).

What is a contract?

A contract is an agreement between two or more parties which creates legal rights and obligations between the parties involved.

• Agreement: the parties reach a common understanding on the terms.
• Legal rights and obligations: each party can go to court to enforce the promise made to him.

Who are the parties to a contract?

Parties to a contract are the persons who have made an agreement that the law recognises as a valid contract.

• Landlord and tenant: the landlord lets the house and the tenant pays rent.
• Insurer and insured: the insurer promises compensation and the insured pays premiums.
• Bank and customer: the bank keeps the customer’s money and provides services.
• Vendor and vendee: the vendor is the seller and the vendee is the buyer.

What are the essential elements of a valid contract?

A valid contract has six essential elements: offer and acceptance, valuable consideration, intention to create legal relations, legal capacity, genuine assent and a legal object.

1. Offer and acceptance
2. Valuable consideration
3. Intention to create a legal relationship
4. Legal capacity of the parties
5. Genuine assent
6. Legal object

What are offer and acceptance?

An offer is a definite statement of the terms on which one party is ready to make a contract, and acceptance is the other party’s unconditional agreement to those terms.

• Offeror: the party who makes the offer.
• Offeree: the party to whom the offer is made.
• Acceptance: the offeree agrees to the offeror’s proposal without attaching any conditions.
• Counter-offer: an attempt to accept with changes. It is a new offer and needs its own acceptance before a contract exists.
• Example: Bola offers a phone for ₦40,000 and Chidi replies that he will pay ₦35,000. Chidi has made a counter-offer.

What is valuable consideration?

Consideration is whatever is done, suffered or promised by one party in return for the promise of the other party.

• Valuable: to support a simple contract, the consideration must have value.
• Common forms: money, other property, or a promise to pay money or transfer property.
• Example: Samuel offers a motorcycle to Musa for ₦8,000. The ₦8,000 is the consideration.

What is intention to create a legal relationship?

The parties must intend their agreement to have legal effect, otherwise it is not a binding contract.

• Social agreements: an agreement to attend a dinner is not a contract.
• Reason: it neither creates nor is meant to create any legal obligation between the parties.

What is legal capacity of the parties?

Legal capacity is the ability in law of a person to enter into a valid contract.

Three classes of persons cannot validly enter into a contract:

1. Minors: infants under eighteen years of age.
2. Lunatics: insane persons.
3. Drunken persons: persons under the influence of alcohol or drugs.

What is genuine assent?

Genuine assent is the free and mutual consent of all the parties to the agreement.

• Fraud or deceit: consent obtained by lying or cheating is not genuine.
• Misrepresentation: consent based on a false statement is not genuine.
• Undue influence: consent obtained by improper pressure is not genuine.
• Result: where consent is obtained in any of these ways, there is no valid contract.

What is a legal object?

A legal object means the purpose of the contract must not violate any law of the land.

• Court action: courts will not enforce an illegal contract, even when the other five elements are present.
• Criminal examples: an agreement between persons to commit murder or arson.
• Fraud examples: an agreement to defraud individuals or the government.

What are the types of contract?

Contracts are classified into six groups: formal and informal, oral and written, express and implied, valid, void and voidable, executed and executory, and unilateral, bilateral and multilateral.

What are formal and informal contracts?

• Formal contract: a written contract, usually made by affixing a seal to a written agreement or document.
• Informal (simple) contract: a contract, written or oral, that is not under seal.

What are oral and written contracts?

• Oral contract: a contract made by spoken words. It is harder to prove if there is a dispute.
• Written contract: a contract documented on paper. The document serves as evidence.

What are express and implied contracts?

• Express contract: a contract that results from an actual agreement between the parties.
• Implied contract: a contract with no evidence of an actual agreement, but supported by the acts or conduct of the parties.

What are valid, void and voidable contracts?

• Valid contract: an agreement that satisfies all six basic requirements. It is enforceable by law.
• Voidable contract: an agreement lacking some basic requirement, which one of the parties may reject or adopt. Examples are cases of mistake, misrepresentation or ratification.
• Void contract: an agreement without legal effect, usually incapable of enforcement.
• Examples of void agreements: agreements to commit acts contrary to the law, such as murder, forgery, fraud, treason, drug trafficking or prostitution.

What are executed and executory contracts?

• Executed contract: a contract that has been completely performed.
• Executory contract: a contract that has not been completely performed.

What are unilateral, bilateral and multilateral contracts?

• Unilateral contract: a one-sided contract, binding at first only on the person who makes the promise. The other person is free to perform or not.
• Bilateral contract: a contract in which two parties make mutual promises to each other.
• Multilateral contract: a contract in which more than two parties make mutual promises to one another.

How is a contract discharged (determined)?

A contract is discharged when its obligations are no longer binding on the promisor, and this can happen in five ways.

1. Voluntary agreement: the parties agree to end the contract.
2. Breach: a party refuses to perform the obligation imposed on him under the contract.
3. Full performance: all parties have fully carried out their obligations under the contract.
4. Frustration: either party cannot continue because of one of the following:
   • fundamental change of circumstances;
   • subsequent illegality, for example a change in a written law affecting the contract;
   • destruction of the subject matter of the contract;
   • personal incapacity of a party, for example death, lunacy or bankruptcy.
5. Lapse of time: the time agreed for the contract to run comes to an end.

Evaluation

1. What is a contract?
2. List five examples of illegal objects as related to a contract.
3. Differentiate between a voidable contract and a void contract.
4. Differentiate between an express contract and an implied contract.
5. State the five ways in which a contract may be discharged.

Assignment

Ada orally agrees to buy Mr Bello’s bicycle for ₦20,000. Mr Bello hands over the bicycle and Ada pays the full amount. Answer the following:

1. Identify the offer, the acceptance and the consideration.
2. Classify the contract as oral or written, and as executed or executory.
3. State how the contract is discharged.

Further reading:

• Essential Commerce for SSS by O. A. Longe, pages 262 to 273.
• Comprehensive Commerce for SSS by J. U. Anyaele, pages 458 to 465.