Contract Law and Reciprocal Promises - Essay Example

An executory contract raises the question, how does a promise made by A support a reciprocal promise by B, where A has done nothing at the time beyond furnishing a promise in return for B's promise?  Do such reciprocal promises constitute sufficient consideration?  Should such reciprocal promises be considered as good consideration in the modern commercial context? Contract Law and Reciprocal Promises A contract is essentially an exchange of enforceable promises. In a contract, each party may make a promise in exchange for the promise of the other. Mostly, there cannot be a contract without reciprocal promises. Let us consider an example to understand reciprocal promises. Suppose a father promises his son to buy him a mobile phone is he graduates with an A grade. Now, if the son also promises his father that he would work hard and pass with an A grade, this is a reciprocal promise. But in this case, it is important to remember that the situation only explains reciprocal promises, it does not signify a contract because there is nothing written or documented about the promises made. Therefore, when reciprocal promises are followed by some written documentation or agreement, a contract is made. Offer and acceptance are also an integral part of a contract. An offer is simply an initiative to make a contract. If the second party accepts your offer, a contract can be made. A contract is formed by exchange of offer and acceptance. There are several laws that govern contracts and define penalties for any contract breach. Commonly, in legal terms, a contract is successful when offer and acceptance match exactly. Lawyers' call this the mirror image rule.11 However, there are some exceptions to this common notion when it comes to commercial law of sales. Consideration and Contracts Consideration is also a key factor while making a contract. Since, a contract is an exchange of promises; a consideration specifies that the contracting party will receive. A contract is not really a contract, if consideration flows only in one direction. Hence. A contract cannot be enforced unless there is a consideration. Similarly, the fact that a promise was made or given does not necessarily mean that it is a contract. Since, all promises cannot be enforced legally, several legislations have been implemented to define what promises should be legally enforced. On the one hand, in a civilized community men must be able to assume that those with whom they deal will keep the promise made and carry out their expectations. On the other hand, it is neither practical nor reasonable to expect full performance of every assurance given, whether it is thoughtless, casual and gratuitous, or deliberately and seriously made. Consideration is a way of determining the enforceability of promises. Consideration generalizes the conditions under which promises will be legally enforced. Consideration requires that a contractual promise be the product of a bargain. However, in this usage, 'bargain' does not mean an exchange of things of equivalent, or any, value. It means a negotiation resulting in the voluntary assumption of an obligation by one party upon condition of an act or forbearance by the other. Consideration thus insures that the promise enforced as a contract is not accidental, casual, or gratuitous, but has been uttered intentionally as the result of some deliberation, manifested by reciprocal bargaining or negotiation. Various courts in Australia and other countries regard consideration as an important element of a contract. Consideration, as essential evidence of the parties' intent to create a legal obligation, must be something adopted and regarded by the parties as such. Thus, the same thing may be consideration or not, as it is dealt with by the parties. In substance, a contractual promise must be of the logical form: 'If . . . (consideration is given) . . . then I promise that . . ..' Of course, the substance may be expressed in any form of words, but essentially this is the logical structure of those promises enforced by the law as contracts2. Consideration and Reciprocal Promises Promises which form the consideration or part of the consideration for each other are called reciprocal promises. Further, acceptance of any consideration for a reciprocal promise which may be offered with a proposal is an acceptance of the proposal. The promise could be either express or implied. When a promise is made in words, it is said to be an express promise. When the promise is accepted in any written form, it is said to be implied. There are several legal conditions specified around reciprocal promises. These include: A Promissory is not bound to perform, unless reciprocal promisee is ready and willing to perform. This implies that when a contract includes a reciprocal promise that needs to be simultaneously performed, there is no compulsion for the promissory to perform his promise until and unless the promisee is ready and willing to perform his reciprocal promise. Where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they should be carried out in that specified order, and where the orders is not expressly fixed by the contract, they should be performed as required by the nature of the transaction. When a contract contains reciprocal promises and one party to the contract prevents the other from performing his promise, the party prevented can cancel the contract and is also entitled to compensation from the other party for any loss suffered due to cancellation of the contract. When a contract consists of reciprocal promises, such that one of them cannot be performed until the other has been performed, and the promissory fails to perform it, such promissory cannot claim the performance of the reciprocal promise, and must make compensation to the other party for any loss which the other party may sustain by the non-performance of the contract. When a party promises to do a certain thing at or before a specified time, and fails to do so within the stipulated time period, the contract becomes voidable at the option of the promisee, if the intention of the parties was that time should be of essence of the contract. In case, it was agreed that time was not of essence in the contract, then the contract does not become voidable but the promisee is entitled to compensation from the promissory for any loss occasioned to him by such failure. Where persons reciprocally promise, firstly to do certain things which are legal, and, secondly under specified circumstances, to do certain other things which are illegal, the first set of promise is a contract, but the second is a void agreement3. Reciprocal Promises in Commercial Context Contracts form an essential part of any business. It is of utmost importance that all legal practitioners, for the purposes of advising clients properly, understand the significance of negotiations leading up to a contract, what terms constitute a contract, how statutes such as section 52 of the Trade Practices Act affect contracts and how to draft a contract to a client’s best advantage. An important definition in this regard was made by the court in the ruling for Tramways Advertising Pty Ltd v Luna Park (NSW)Ltd. The court said: The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or substantial performance of the promise, as the case may be, and this ought to have been apparent to the promiso4r. The implications of this ruling hold reciprocal promises in good consideration. Since the business is based on mutual trust and agreements, contract and reciprocal promises cannot be done away with. However, rulings from previous cases of conflict and various regulations in the contract law ensure safety for all the parties involved in the contract. Even in a situation where A supports a reciprocal promise by B, where A has done nothing at the time beyond furnishing a promise in return for B's promise, both A and B are confounded by various legislations of the contract law, and breach from either party can result in penalization to safeguard the other party’s interest. An interesting case in this regard is the Foran & Anor v Wight & Anor case. The circumstances in the case were such that the an essential time stipulation was not complied with by one party and the contract were mutually dependent on obligations. The case was a contract for sale of land. Time was of the essence. Some days prior to the completion date, the vendors represented that they would not be able to complete on time. At that time the purchasers did not have enough finance to purchase the house. Neither party acted on completion date. Two days later purchasers purported to rescind the contract, and seek their deposit back. When one party, purports to repudiate the contract, the other party, may either accept the repudiation, and rescind the contract or allow the contract to remain on foot. There is no third option. Further, if the contract remains on foot, it does so for the benefit of both parties. For one party to sue for the other's breach under contract they must show that, under ordinary contract principles, they were ready and willing to perform their obligations under the contract as at the time of the other's breach. Where A represents to B that B needn't perform B's obligations under an executory contract (i.e. one to be performed in the future), or that it would be pointless for B so to do, B is released from the performance of those obligations until such time as A withdraws that representation. Also, if B wishes to sue under the contract for A's failure, B must be able to show that they were ready and willing to perform their obligations as at the receipt of A's representation. The onus of this is discharged if they can show they were "not incapacitated from [performing their obligations] and were not decided against doing so". In this case, the repudiation was not accepted (i.e. it was an action for actual breach), but according to Brennan, Deane, Dawson, the vendor's representation stopped them from arguing that the purchasers needed to be ready and willing to complete on time. To rely on the estoppels, the purchasers had to show that they were ready and willing to complete as at receipt of the repudiation. They discharged this onus. The vendor's consideration totally failed, so the purchasers were entitled to the return of the entirety of the deposit. In Foran & Anor v Wight & Anor Brennan J stated: • If an executory contract creates obligations which are mutually dependent and concurrent and, before the time for performance of the obligations arrives, one party, A, gives the other party, B, an intimation that it will be useless for B to tender performance and B abstains from performing his obligation in reliance on A’s intimation, B is dispensed from performing his obligation and A’s obligation is absolute provided that B had not repudiated the contract and he was ready and willing to perform his obligation up to the time when the intimation was given5; • It is immaterial that A’s intimation amounts to a repudiation of the contract unless B terminates the contract by accepting the repudiation; In Foran v Wright it was established that the breaching party impliedly represents to the other party that they (the other party) do not have to fulfil their obligations under the contract. Hence the initial breaching party is stopped from relying on the innocent party’s subsequent breach as a ground for termination6. In wake of this case, the reciprocal promises stand a good consideration in the commercial context as there are well defined legislations to check breaches and termination of contracts. Further, the contract law in Australia lays down several conditions that safeguard the parties involved in any type of reciprocal promises. The Act lays down the following rules regarding performance of reciprocal promises: When a contract consists of reciprocal promises to be simultaneously performed no promissory need perform his promise unless the promisee is ready and willing to perform his reciprocal promise (Sec 51). In addition, in order to enable one party to sue on the contract he must have performed his part of the reciprocal promise. Where promise can be enforced without the party showing performance of his part of the promise, promises are not reciprocal but independent of each other. Reciprocal promises are concurrent promises and, therefore, they should to be performed simultaneously. Both parties must be ready and willing to perform their parts of reciprocal promises, for example, in case of sale of shares of a company promise it transfer the shares and payment of price thereof are simultaneous. Further, when a contract consist of such reciprocal promises, that one of them cannot be performed until the other has been performed and the promissory or the promisee last mentioned fails to perform it, such promissory cannot claim the performance of the reciprocal promise. He must make compensation to the other party to the contract for any loss which such other party may sustain by the non-performance of the contract (Sec 54) An illustration of this clause is a situation wherein A promises B to sell him one hundred bales of merchandise, to be delivered next day, and B promises A to pay for them within a month. A does not deliver according to his promise. B’s promise to pay need not be performed and A must pay a compensation for not initiating the promise. Compensation for Breach of Contract or Reciprocal Promises If there is a specific sum mentioned in the contract to be paid as compensation, and the contract has been broken, then the party complaining of the breach is entitled, whether or not actual damage or loss or proved to have been caused thereby, to receive the compensation from the party who has broken the contract. Similarly, a person who rightfully rescinds a contract is entitled to consideration for any damage which he has sustained through the non fulfilment of the contract. Further, apart from the compensation, either party may be conferred the right to terminate the contract if it finds and it is proven that the other party is breaching the contract. The right to terminate for breach is a right to terminate the obligations of the parties to perform their contractual duties. A right to terminate may be conferred by contract or it may be implied by law. There are three main situations on which the right will be implied by law: (1) for breach of a condition; (2) for a sufficiently serious breach of an intermediate term; or (3) in respect of an absence of readiness or willingness to perform constituting a repudiation or capable of being treated as an anticipatory breach of contract. An anticipatory breach condition arises when, prior to the time appointed for performance by the promissory, the promisee justifiably terminates the performance of the contract. Whether the promisee’s termination is justified depends on whether the conduct of the promissory, or the position of the promissory, gives rise to a repudiation of an obligation or demonstrates that the promissory is no longer able to perform the contract. Anticipatory breach arises on termination by the promisee7. Next, this is to be compared with failure to perform, which need not lead to a right to terminate. Therefore, if the promissory repudiates his or her contractual obligations before the time for performance, an anticipatory breach arises if and when the promisee terminates the contract. If the promisee does not terminate the contract and the promissory continues to repudiate, an actual breach will arise when the promissory fails to perform. A contract can also be discharged in circumstances where there has not been a breach by either party. The principal case in which discharge of a contract may occur without either party being in breach of contract is under the doctrine of frustration. This includes frustration by supervening illegality. There are also other circumstances where a contract can be discharged independent of fault, such as where a contract is discharged by express or implied agreement, or in exercise of an express contractual or statutory right this does not depend on breach by the other party. As a matter of construction or by virtue of an implied term of the contract, either party may be entitled to terminate the contract on giving notice to the other party. However, there is no general rule that a contract may be terminated by notice. In the given light, in an executory contract raises reciprocal promises constitute sufficient consideration as there are well defined rules to control breach and specified penalties, in case a breach occurs. Read More