Business Law

Midterm Review
Learning Objectives
Categories of Law
 common law v. civil law
 civil law v. criminal law

Civil Court System

Precedent

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Learning Objectives (cont.)
Law of Contract
 What is a contract?
 How to create a valid contract

 Offer and Acceptance

 Terms of a contract

 Vitiating factors

 Discharge of contracts

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What is Law?
Law provides rules
It tells us what we can and cannot do
This is true in our personal lives (eg
criminal law)
And in our business lives (eg contract law)
Therefore, it is important for a
businessperson to know the rules which
apply to them
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 Categories of Law
Law is a very large field, and it is common to
divide it into categories
common law and civil law
common law and statute law
private law and public law
civil law and criminal law

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Common Law v. Civil Law
Here, the terms describe two general types
of legal system

Common Law Civil Law

Case law and the Consists of a legal
courts are most code of general
important source of principles which is the
law source of law

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Civil Law and Criminal Law
In this category, “civil law” has a different
meaning from the Common Law and Civil
Law category

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Civil Law
In this category, civil law deals with the
relationships between individual citizens
Its purpose is to settle arguments between
individuals
It helps people to find remedies
 it doesn’t really punish people
Civil Law includes all Private Law and
some Public Law
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Criminal Law
Criminal Law deals with rules created by
the State which forbid certain behaviour
These are “crimes”
Criminal Law punishes people
 it does not provide remedies
Criminal Law is usually what people think
of when they think about “The Law”
Criminal Law is part of Public Law
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Civil Court System
The civil court system provides a place for
individuals to settle their arguments
You can think of it like a boxing match
where the court is the boxing ring, the judge
is the referee, and the individuals are the
fighters

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Civil Court System (cont.)
The civil courts are arranged in a hierarchy
Court cases begin in the lower courts
If an individual loses, they can appeal to a
higher court
They hope that the higher court will change
the decision of the lower court in their
favour

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 Terminology
Some common legal words and phrases used
in English civil law
civil proceedings: a court action in a civil
matter such as contract
claimant: the person who starts the civil
proceedings in order to get some kind of
remedy (eg money)
defendant: the party whom the claimant
seeks the remedy against
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Terminology (cont.)
to sue: to bring civil proceedings against
someone (ie the defendant)
The claimant sues the defendant to try to get
a remedy (such as the payment of money)
If the court agrees with the claimant’s
argument the claimant will be successful
and win his case
 (the court finds in his favour)
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Terminology (cont.)
If the court thinks that the defendant has a
better argument than the claimant then the
defendant will win
 (the court finds in favour of the defendant)
Usually, the party who loses a civil court
case has to pay their own legal costs and
the legal costs of the winner

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Precedent
The English civil courts are arranged in a
hierarchy
The House of Lords is at the top of this
structure
According to the rules of precedent a
decision of a higher court is binding on a
lower court

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Precedent (cont.)
So, a judge in the County Court must follow a
decision made in the High Court, Court of Appeal
or House of Lords
And a judge in the High Court must follow a
decision made in the Court of Appeal or House of
Lords
The Court of Appeal must follow the House of
Lords
This also applies to decisions of courts at the same
level
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Terminology
The legal name for precedent is stare
decisis

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Finding a precedent (cont.)
However, not all parts of a decision in a
previous case are part of the precedent
which has to be applied
There are two parts to a decision is a case
 ratio decidendi
 obiter dicta

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Ratio Decidendi
Ratio decidendi roughly means “reason for
deciding”
In other words, it is the legal reason that the
judge used to decide the case
This is the part of the case which forms the
precedent
Later cases should follow the same legal
reasoning
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Obiter Dicta
Obiter dicta roughly means “outside words”
In other words, these are just extra
comments made by the judge
Often they are theoretical examples or
alternatives which the judge has thought
about
Obiter dicta do not form part of the
precedent which must be followed
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Application of Precedent
Although the general rule of precedent is
that a previous decision of a higher court
must be followed, there is some flexibility
Judges can avoid following a precedent by
overruling it or distinguishing it

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Overruling
A higher court can overrule a precedent set
earlier by a lower court
Many precedents are very old, and so they
may no longer be relevant in modern
society
However, it is a serious matter to overrule a
precedent, and courts do not do it very often

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Distinguishing
Precedent applies to cases of a similar
nature
Therefore, if it can be shown that the
situation in the present case is different in
some way from the situation in the
precedent, then the judge does not have to
apply the precedent.
This is the main way to avoid applying a
precedent.
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Law of Contract
The Law of Contract is part of Civil Law

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Why have a Law of Contract?
We saw that contracts can arise in simple,
everyday situations, such as buying a
newspaper or taking a bus
Modern society operates by people and
companies exchanging goods and services
The Law of Contract helps to give a
structure to this

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Why have a Law of Contract?
The Law of Contract is part of Private Law
so it is concerned with relationships
between parties
It helps us to decide what is a valid contract
The Law of Contract is also part of Civil
Law so it is also concerned with remedies
It helps us the other party to a contract does
not keep to the agreement
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Definition of a contract
A legally binding agreement
that means there must be some kind of
agreement between two parties
However, not all agreements are contracts
because not all agreements are legally
enforceable
legally enforceable means that a court will
say that an agreement is a contract
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Creating a valid contract
In order to create a valid contract, there
must be
 An offer
 An acceptance

 Consideration

 Capacity to contract

 Intention to create legal relations

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Definition of Offer
The person making the offer is the offeror
The person who accepts the offer is the
offeree
An offer is a promise by the offeror to be
bound in a contract on particular terms if
there is a proper acceptance of the offer by
the offeree

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Simple Example
John says to Jim, “I will sell you this book
for £10”.
Jim says, “I agree”.
We have an offer and an acceptance
John is the offeror
Jim is the offeree

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Identifying Offers
Some types of statement are not offers:
 statement of intention
 supply of information

 invitation to treat

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Invitation to Treat
This is an invitation to others to make offers
In other words, you are asking other people
to make an offer to you

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 Invitation to Treat (cont.)
Some common examples of invitations to
treat
goods displayed in a shop window
goods displayed on the shelf of a self-
service shop
a public advertisement
a share prospectus

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 Who is the offeree?
An offer can be made to
A particular person
A group of people
The whole world

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Who is the offeree? (cont.)
If the offer is made to a particular person
(or group) then only that person (or group)
may accept the offer
Eg: If I offer to sell my car to Jim then only
Jim may accept that offer. John cannot
accept.

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Who is the offeree? (cont.)
If the offer is made to the whole world then
anyone can accept
We saw an example of this in Carlill v.
Carbolic Smoke Ball Company
Mrs Carlill accepted the offer by her actions
 She bought and used the medicine

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Knowledge of the offer
You have to know about the offer before
you can accept it
If you find my lost dog and return it without
knowing that I had offered to pay £100 to
the person who found it, then you cannot
later claim the reward when a friend tells
you about it

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Acceptance
Once the offeree accepts the offer the
contract is made
After that, the offeror cannot withdraw the
offer and the offeree cannot withdraw the
acceptance

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What is Acceptance?
The acceptance must agree to the terms of
the contract
The acceptance cannot try to introduce new
terms

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Counter-Offers
If the offeree tries to change the terms of
the offer in the acceptance, then this is not
an acceptance, it is a counter-offer
A counter-offer rejects the offer
The position of the two parties is reversed
The offeree becomes the offeror and the
offeror becomes the offeree

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Counter-Offers (cont.)
For example, in Hyde v Wrench, Wrench
offered to sell his farm for £1,000
Hyde offered £950
Wrench rejected this
Hyde then told Wrench he would
accept Wrench’s original offer
However, the court said there was not
contract
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Counter-Offers (cont.)

The counter-offer of £950 ended the

offer of £1,000 so it could no longer be
accepted
That meant Hyde was now making a
new offer to buy the farm for £1,000
Wrench could choose to accept or
reject this
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Classical Model
The rules which we have looked at for deciding
what makes a proper offer and proper acceptance
are the classical legal model
They show how a contract should be created
An offeror makes an offer and if it is accepted by
the offeree, a valid contract is made
If the offeree makes a counter-offer then the
parties change roles with the offeree becoming the
offeror and the offeror now becoming the offeree
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Classical Model (cont.)
If the parties continue negotiating then they
could change roles several times as offers
and counter-offers are made
Eventually, an offer will be matched with
an acceptance and a contract will be created

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Terms of a Contract
Once we know how to create a valid
contract, we need to think about what is in a
contract
A contract is an agreement
The terms of a contract express what the
parties to the contract have agreed
A term in a written contract is often called a
clause
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Types of Terms
Once we know that a statement is a term in
a contract, we need to identify what kind of
statement it is
This is important as different kinds of
statements have different remedies when a
party breaches them
A breach of contract occurs when one
party does not follow an agreed term of the
contract
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 Types of Term (cont.)
There are 3 types of term:
Conditions
Warranties
Innominate terms

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Conditions
A condition is a basic and important part of
the contract
If one party breaches a condition then the
other party may
 End the contract
 Refuse to perform their part of the contract

 Continue with the contract but then sue for

damages

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Warranties
On the other hand, a warranty is not vital to
the contract
If one party breaches a warranty then the
other party can only continue with the
contract and then sue for damages

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Innominate Terms
These are terms which may be either
conditions or warranties
It depends how serious the breach of the
contract is
If the breach is serious the court will say the
term was a condition
If the breach was less serious then the court
will say it was a warranty
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Exclusion Clauses

Exclusion clauses are terms of a contract

which try to limit the liability of one of the
parties if they breach the contract
These clauses can create unfair situations
where one party is able to insist they are
included in the contract because that party
is much stronger than the other party

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Exclusion Clauses (cont.)
One area where the courts and Parliament
have tried to control the effect of exclusion
clauses is in contracts between business and
individual consumers
This is because the business is usually in a
stronger position than the consumer

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 Dealing with Exclusion Clauses
When a court looks at an exclusion clause, it
thinks about 3 things:
Has the exclusion clause been included in
the contract?
How should the exclusion clause be
interpreted?
Does the Unfair Contract Terms Act 1977
apply to the exclusion clause?
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Included in the Contract
An exclusion clause has to be part of the
contract or it has no effect
There are 3 ways that an exclusion clause
can become a term in a contract
 By signature
 By notice

 By custom

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By notice
Except in the case where someone does not
read the contract, an exclusion clause is
only valid where the person knew about it
or was given notice of it
For example, you arrive at a hotel and book
a room for a few days
When you get to your room, you find a sign
inside which says that the hotel is not
responsible if any of your things are stolen
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By notice (cont.)
However, the hotel will not be able to rely
on this exclusion as the contract was made
before you got to your room
The contract was made at the reception desk
of the hotel before you had a chance to see
the sign

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Vitiating Factors
In order to create a valid contract, there
must be
 An offer
 An acceptance

 Consideration

 Capacity to contract

 Intention to create legal relations

There must also be no vitiating factors

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Vitiating Factors (cont.)
Vitiating factors is the technical term for
the things which make a contract void or
voidable

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Valid Contracts
These are agreements which are completely
binding and enforceable
Parties to valid contracts gain rights and
responsibilities
The courts will make sure that the parties
follow these rights and responsibilities if
there is any argument

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Void Contracts
In fact, these are not contracts at all
They have no legal effect
The important thing to remember is that you
cannot enforce a void contract

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Voidable Contracts
This kind of contract is valid unless one of
the parties has it set aside (ie declared void)
This could happen where one party is
tricked into entering a contract by the other
party (ie a misrepresentation)

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 Vitiating Factors (cont.)
The following are vitiating factors which
make a contract void or voidable
Mistake
Misrepresentation
Duress
Undue influence
Public policy

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Misrepresentation
A misrepresentation is a false statement which
persuades someone to enter into a contract
The contract is then voidable
Misrepresentation has 3 parts
 A statement
 The statement is about a fact which can be checked
 The statement causes the party to enter into the contract

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A fact
The representation must be a statement
about a specific, existing fact or event
which can be checked
Therefore, the following things are not
statements of fact
 Advertising hype
 Statements of law
 Statements of opinion
 Statements of intention

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Advertising Hype
Statements such as “this is the best toothpaste in
the world” or “this is the finest sofa on the
market” are not representations
They are simply statements made to try to interest
the buyer
However, if the salesperson said something like
“this car uses the same engine as a BMW” then
this may be a misrepresentation if it is not true
This is closer to a statement of fact
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Types of Misrepresentation
There are 3 types of misrepresentation
 Fraudulent misrepresentation
 Negligent misrepresentation

 Innocent misrepresentation

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Discharge of Contracts
Discharge of a contract means that the
parties are released from their obligations in
the contract
 ie they no longer have to do what they agreed

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 Discharge of Contracts (cont.)
A contract can be discharged in 4 ways
Performance
Agreement
Frustration
Breach

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Summary
Categories of Law
 common law v. civil law
 civil law v. criminal law

Civil Court System

Precedent

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Summary (cont.)
Law of Contract
 What is a contract?
 How to create a valid contract

 Offer and Acceptance

 Terms of a contract

 Vitiation factors

 Discharge of contracts

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