2. Text for reading. The Law of Contract

Legal obligations arise from many sources of which the two main types are tortious and contractual obligations. Contractual obligations arise where one person makes a legally enforceable promise to another which puts the promisor under an obligation to perform his promise under the sanction of an action against him for breach of contract. A tortious obligation is an obligation not to wrong another by conduct that the law of torts establishes as wrongful. A person breaking such an obligation will face a legal action in respect of the tort.

An obligation implies the existence of an “obligor”, the person who is legally under the obligation, and an “obligee” for whose benefit the obligation exists. The existence of the obligee who can enforce the obligation for his own benefit by a legal action distinguishes the law of obligations from the criminal law.

Obligations can also arise under a trust which can be seen as comparable to contract in the sense that the trustee accepts the obligation to look after someone else’s property, rather than having the obligation imposed on him. Partners, company directors, agents and bank managers can be regarded as being in a quasi-trustee position vis-a-vis the partnership property and their partners’ interests or the company’s property or the interests of the principal or the account holder. In addition employees owe fiduciary duties to their employers.

Trustees and quasi-trustees have an obligation to take care of the property entrusted to them and will be liable for any breach of their fiduciary duties together with any third party who knowingly assists in it. Thus, if a company’s directors misappropriate the property of the company, they will be liable as quasi-trustees to account to the company for the property which they have misappropriated and, if they have been aided by bankers or others who knew or ought to have known that what was being done was a misappropriation of assets, they may be liable to the company as constructive trustees. This obligation not to be the unwitting instrument of another’s fraud is rather similar to tortious liability in negligence.

Essentials of a Contract

There are three essentials to be complied with for an obligation by promise to be enforceable: (i) there must be a matching offer and acceptance; (ii) the promise must be by deed or supported by valuable consideration; and (iii) the parties must have intended to create legal relations.

Contracts for the Sale of Goods

Contracts for the sale of goods are contracts ‘whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price’. The word ‘property’ refers to ownership. The definition takes into account agreements where the ownership in the goods will not transfer immediately but at some later date. This type of contract is ‘an agreement to sell’. The use of the word ‘property’ excludes any type of contract relating to goods where ownership does not pass. Thus it excludes contracts relating to hire of goods or contracts of bailment where possession but not ownership passes.

‘Goods’ includes ‘emblements, industrial growing crops and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale’. Thus crops comes within the definition of goods. Other things which are ‘attached to or form part of the land’ are ‘goods’ if they are distinct from the land. ‘Goods’ includes all ‘chattels personal’, that is all tangible moveable things. The goods must be transferred for a ‘money consideration, called the price’. This excludes contracts of barter. However, contracts under which goods are transferred by a combination of money plus other goods are included.

If the main purpose of the contract is not the transfer of property to the buyer, even though there is an element of transfer, such a contract is a contract for labour and materials. In Robinson v. Graves [1935], the Court of Appeal held that a contract by an artist to paint a client’s portrait was not a contract for the sale of goods since the main element in the contract was the skill of the artist. The same applies where a garage fits new parts to a car while carrying out a service or other repair, or a builder supplies bricks under a contract to build a wall or tiles when building a house.