The Modern Commercial Law and Law of Contract - Essay Example

The parties are drawn into a close legal relationship with each other which is governed by the agreement that they have made. The legal relationship creates rights and obligations between the parties and binds only between those who are privy to the contract, and not other people who are not parties (often described in law books as “strangers” or by the misnomer “third parties”) even though those people may be affected by the contract directly or indirectly (p. 15).

Usually, the agreement will contain a promise or set of promises that each party has made to the other: this is known as a bilateral contract because each party promises to do something. For example, X promises to build a house for Y and Y promises to pay X for doing so. Sometimes only one party will make a promise to do something if the other party actually does something stipulated by the former. For example, X promises to pay $100 if Y completes and returns a marketing questionnaire to X. Such a contract is known as a unilateral contract because the promise is one-sided. Although X promised to pay in the stipulated circumstances, Y is under no obligation to complete and return the marketing questionnaire but if he does the court or arbitral tribunal will recognize a binding agreement that X will pay him $100. In building projects during negotiations for the award of a formal contract one sometimes finds so-called letters of the intent expressed in terms such as these: “Please proceed with the works and if no formal contract is concluded we will pay you your costs and expenses that you have incurred” (Richard & Stone 2005, p. 115). It is often not appreciated that a letter in such terms can create a unilateral contract that the court will enforce, albeit not the formal contract that the parties had hoped to finalize. And although one often talks of a “written” or “formal” contract it is not really the piece of paper that itself is the contract – the piece of paper merely records what the terms of the contract are (p. 116). For most types of contract, there is no requirement for a written document and an oral contract is just as binding in law, although in practice when there is a dispute proving later what was orally agreed at the outset is more difficult. That difficulty is avoided if there is documentary evidence of what was agreed. Indeed, the usual (though not always the inflexible) rule is that the written document containing the agreed terms will be decisive evidence of the contract whatever the parties have said previously: this is sometimes called the “four corners” rule (p. 118).