lOMoAR cPSD| 47882337
VIETNAM NATIONAL UNIVERSITY
UNIVERSITY OF LANGUAGES & INTERNATIONAL STUDIES ----- ----- BUSINESS LAW (BUS 206)
TOPIC: CRITICALLY ANALYSE THE STATEMENT THAT CONTRACTS
ARE ONE OF THE EFFECTIVE TOOLS TO ALLOCATE THE RISKS
BETWEEN THE PARTIES TO CONTRACT AND PREVENT THE RISKS FULL NAME: LE THI LINH CLASS: SNHU20E5 ID STUDENT: 20043568
LECTURER: NGUYEN BINH MINH lOMoAR cPSD| 47882337
Critically analyse the statement that contracts are one of the effective tools to
allocate the risks between the parties to contract and prevent the risks.
We have a few questions for this statement: - What is contract law? - What is contract risk?
- Before signing the contract, what should be done to minimize the risk?
- When there is a contract, how must the parties comply with the contract?
- What if one of the two parties violates, unilaterally cancels the contract?
- When the other party violates, breaks the contract, what benefits will we enjoy and vice
versa when we cancel the contract, how do we have to compensate?
- Contracts protect our interests when there are unexpected risks in the course of business
cooperation => protect our business and help promote better end results.
We understand risk as any event, circumstance or condition that may occur and result in
unfavourable outcomes. Many people consider that a contract is an effective tool for allocating
risks between the contracting parties and preventing risks. Many people consider that a contract
is an effective tool for allocating risks between the contracting parties and preventing risks. I
completely agree with this statement, this article will tell you some definitions of contract law
and the benefits of contracts for the purpose of avoiding risks for the contracting parties.
First, we learn about the nature and terminology of a contract to help us understand the concept and elements of a contract.
Contract law deals with, among other things, the formation and keeping of promises. A promise
is a declaration by a person (the promisor) to do or not to do a certain act. As a result, the person
to whom the promise is made (the promisee) has a right to expect or demand that something
either will or will not happen in the future.
Like other types of law, contract law reflects our social values, interests, and expectations at a
given point in time. It shows, for instance, to what extent our society allows people to make
promises or commitments that are legally binding. It distinguishes between promises that create
only moral obligations (such as a promise to take a friend to lunch) and promises that are legally
binding (such as a promise to pay for items ordered online). lOMoAR cPSD| 47882337
Contract law also demonstrates which excuses our society accepts for breaking certain types of
promises. In addition, it indicates which promises are considered to be contrary to public policy
—against the interests of society as a whole—and therefore legally invalid. When the person
making a promise is a child or is mentally incompetent, for instance, a question will arise as to
whether the promise should be enforced. Resolving such questions is the essence of contract law.
An Overview of Contract Law. Before we look at the numerous rules that courts use to
determine whether a particular promise will be enforced, it is necessary to understand some
fundamental concepts of contract law. In this section, we describe the sources and general
function of contract law and introduce the objective theory of contracts.
Sources of Contract Law. The common law governs all contracts except when it has been
modified or replaced by statutory law, such as the Uniform Commercial Code (UCC), or by
administrative agency regulations. Contracts relating to services, real estate, employment, and
insurance, for instance, generally are governed by the common law of contracts.
The Function of Contract Law. No aspect of modern life is entirely free of contractual
relationships. You acquire rights and obligations, for example, when you borrow funds, buy or
lease a house, obtain insurance, and purchase goods or services. Contract law is designed to
provide stability and predictability, as well as certainty, for both buyers and sellers in the marketplace.
Contract law assures the parties to private agreements that the promises they make will be
enforceable. Clearly, many promises are kept because the parties involved feel a moral obligation
to keep them or because keeping a promise is in their mutual self-interest. The promisor (the
person making the promise) and the promisee (the person to whom the promise is made) may
also decide to honor their agreement for other reasons. In business agreements, the rules of
contract law are often followed to avoid potential disputes.
By supplying procedures for enforcing private contractual agreements, contract law provides an
essential condition for the existence of a market economy. Without a legal framework of
reasonably assured expectations within which to make long-run plans, businesspersons would be
able to rely only on the good faith of others.
Duty and good faith are usually sufficient to obtain compliance with a promise. When price
changes or adverse economic factors make contract compliance costly, however, these elements
may not be enough. Contract law is necessary to ensure compliance with a promise or to entitle
the innocent party to some form of relief. lOMoAR cPSD| 47882337
The Definition of a Contract. A contract is “a promise or a set of promises for the breach of
which the law gives a remedy, or the performance of which the law in some way recognizes as a
duty.” Put simply, a contract is an agreement that can be enforced in court. It is formed by two or
more parties who agree to perform or to refrain from performing some act now or in the future.
Generally, contract disputes arise when there is a promise of future performance. If the
contractual promise is not fulfilled, the party who made it is subject to the sanctions of a court.
That party may be required to pay damages for failing to perform the contractual promise. In a
few instances, the party may be required to perform the promised act.
The Objective Theory of Contracts. In determining whether a contract has been formed, the
element of intent is of prime importance. In contract law, intent is determined by what is called
the objective theory of contracts, not by the personal or subjective intent, or belief, of a party.
The theory is that a party’s intention to enter into a legally binding agreement, or contract, is
judged by outward, objective facts. The facts are as interpreted by a reasonable person, rather
than by the party’s own secret, subjective intentions. Objective facts may include:
o What the party said when entering into the contract.
o How the party acted or appeared (intent may be manifested by conduct as well as by oral
or written words). o The circumstances surrounding the transaction.
Elements of a Contract. The many topics on contract law require an understanding of the basic
elements of a valid contract and the way in which a contract is created. It is also necessary to
understand the types of circumstances in which even legally valid contracts will not be enforced.
Summer is approaching, and as owner of owner of a fashion design company, you are offering
your local retailer fifty t-shirt for $2.00 each. He says to you, “I will buy it.” The moment he
agrees to buy, a legally enforceable contract has been established between you and the retailer. In
other words, if you or the retailer does not fulfill the contractual promise, the non-breaching
party can sue the breaching party for breach of contract.
Contracts serve an important purpose in our society because they provide certainty, predictability,
and stability. In the example above, both you and the retailer benefit from the contract because if
either party breaches the contract, there will be a remedy at law. The first step to any contract
question is to make sure that a contract actually exists. There are several elements that go into a
contract, and they must be present for a contract to be legally binding.
The first element to any contract is an offer. The offer “must contain objective intent to make an
offer, definite material terms and communication to the offeree.” If a reasonable person interprets
the offeror’s words as anything other than an offer, such as a joke or an invitation to make an
offer, then an offer has not been made. The second element to a contract is an acceptance. The lOMoAR cPSD| 47882337
acceptance is only valid “if it demonstrates objective intent to accept, mirrors the material terms
of the offer and is communicated to the offeror.” In our example, if the retailer offers to buy your
t-shirt for $1.75 each after you have made your offer for $2.00 each, there has been no
acceptance. Rather, a counteroffer has been made. This counteroffer ends the original offer and
directs the power to accept back to the original offeror. The third element to a contract is
consideration, or something of legal value. Each party to the contract must receive something of value for a contract to form.
In addition to the previous elements, given that the purpose of the agreement does not violate the
law, and there is a mutual assent between the contracting parties, a legally binding contract has
been formed. However, courts may not always enforce contracts as written, even if they have
satisfied all of the required elements. As we will see in the examples below, there are
circumstances when courts do not enforce contracts according to their terms.
Requirements of a Valid Contract. The following list briefly describes the four requirements
that must be met before a valid contract exists. If any of these elements is lacking, no contract will have been formed.
o Agreement. An agreement to form a contract includes an offer and an acceptance. One
party must offer to enter into a legal agreement, and another party must accept the terms of the offer.
o Consideration. Any promises made by the parties to the contract must be supported by
legally sufficient and bargained-for consideration (something of value received or
promised, such as money, to convince a person to make a deal). o Contractual
capacity. Both parties entering into the contract must have the contractual capacity to
do so. The law must recognize them as possessing characteristics that qualify them as
competent parties. o Legality. The contract’s purpose must be to accomplish some
goal that is legal and not against public policy. An agreement to form a contract can
modify the terms of a previous contract. When a dispute concerns whether this
occurred, the offer and acceptance of both agreements can be reviewed to determine
their effect. As in every case involving a contract, the parties’ subjective beliefs with
respect to the terms are irrelevant, particularly in the absence of any evidence to support those beliefs.
Defenses to the Enforceability of a Contract. Even if all of the requirements listed above are
satisfied, a contract may be unenforceable if the following requirements are not met. These
requirements typically are raised as defenses to the enforceability of an otherwise valid contract. lOMoAR cPSD| 47882337
o Voluntary consent. The consent of both parties must be voluntary. For instance, if a
contract was formed as a result of fraud, undue influence, mistake, or duress, the
contract may not be enforceable.
o Form. The contract must be in whatever form the law requires. Some contracts must be in writing to be enforceable.
Types of Contracts. There are many types of contracts. They are categorized based on legal
distinctions as to their formation, performance, and enforceability Formation:
o Bilateral: A promise for a promise.
o Unilateral: A promise for an act—that is, acceptance is the completed performance of the act.
o Formal: Requires a special form for creation. o Informal: Requires no special form for creation.
o Express: Formed by words (oral, written, or a combination). o Implied: Formed by the conduct of the parties. Performance:
o Executed: A fully performed contract. o Executory: A contract not fully performed. Enforceability:
o Valid: The contract has the necessary contractual elements: agreement (offer and
acceptance), consideration, legal capacity of the parties, and legal purpose. o
Voidable: One party has the option of avoiding or enforcing the contractual obligation.
o Unenforceable: A contract exists, but it cannot be enforced because of a legal defense.
o Void: No contract exists, or there is a contract without legal obligations.
Secondly, we will talk about the concept of contract risk, when entering into a contract, risk is
something no one wants, but sometimes we can't control it. necessary preparations before
entering into a contract with others.
Contract risk tends to affect the operations, arrangements and outcomes of, and the participants
in, a contract. In business-to-business contracts, there may also be collateral damage for
employees of affected businesses.
Let’s first consider a contract in place between two businesses for the supply of certain products
and services. The likelihood of a problem occurring with the contract over its lifetime may or
may not be readily predictable, say like the supplier not being able to fulfil orders. lOMoAR cPSD| 47882337
However, the impact on the parties of such an event may be somewhat more predictable.
A key function of a contract then, is dealing in some manner with various risks, taking account of
past history and anticipating future possibilities, in order to prevent or minimise their future occurrence and their impact.
Naturally enough, not every possible contractual risk can or should be catered for. Probability,
practicality and the parties’ risk appetite should guide contract risk management for key agreements.
However, the flexibility to deal with non-specific uncertainty should certainly be available -
especially within scaling businesses or those that operate in regulated industries. This can be as
simple as providing the option to negotiate changes to the contract if one or more parties to it are
detrimentally affected by unusual or uncertain circumstances.
Third, the contract is an effective tool for allocating risks among the contracting parties and
preventing risks. Before signing a contract, we must think of a plan and additional conditions to
the contract to ensure safety in case of risks.
For example, if you order a computer at company A with the quantity of 100 computers, to
prevent the computer from being damaged or faulty, you should add a clause in the sales contract
that if the computer damaged or defective, company A's side must bear the full responsibility.
You have the right to return the goods and receive compensation, or company A must return the
computer number equal to the number of the damaged computer to you. On the contrary, if
during the term of the contract, you change your mind not to buy anymore, or buy in less
quantity, it means that you have breached the contract and you must compensate party A. before
signing the contract to ensure their own interests.
According to contract law, when two parties have signed a contract, which means that the
contract has been legally valid, the two partners must abide by what has been written in that
contract. If one party does something wrong, the other party has the right to claim compensation
and even sue the wrong-doer for breaching or breaking the contract.
To prevent risks, you can negotiate and negotiate with your partner the terms that are beneficial
to your company, because all activities are in accordance with the contract, not to violate the contract.
Summary, it is absolutely correct to identify the contract as an effective tool to allocate risks
among the contracting parties and prevent risks. Contracts protect our interests when there are
unexpected risks in the course of doing business, it protects our business and helps drive better end results. lOMoAR cPSD| 47882337 References
Linsley, R. (n.d.). An Introduction to Contract Risk Management. Retrieved September 23, 2022,
from https://www.gatekeeperhq.com/blog/an-introduction-to-contract-risk
Business Law - Contracts. (n.d.). Scribd. Retrieved September 23, 2022, from
https://www.scribd.com/document/177577085/Business-Law-Contracts
BUS 206. Business law text and cases. by Clarkson et al._15e_2021. (n.d.).