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Practical Interrogation of the Contract Fundamentals

Executive summary

This essay looks at the antecedents of the making of a contract. The paper uses an agreement for the administrative resolution of claims emanating from penalties charged on the violation of traffic codes. The contract is between the National Highways Traffic Safety Administration (NHTSA) and the Toyota Motor Corporation. The paper discusses the elements of offer and acceptance in their operation. It also examines the nature and the presence of proprietary rights, the conditions, and warranties in the contract, as well as the differences therein. Dispute resolution mechanisms and correct management practices are also discussed, while it concludes by giving recommendations.


Contracts form the core of businesses (Furmston et al. 2012, p. 41). A contract is an implementation through which a business engagement between parties is formalized and its intentions communicated in a proper and binding manner. One would have to bear in mind the relevant law that governs the creation of contracts and enter into agreements that are enforceable by the courts to be able to determine the propriety of a contract under the law (Koffman & Macdonald 2010, p. 9).

Offer and acceptance

The instant contract properly presents the elements of offer and acceptance from its written text. The offer entails communication of willingness by the offeror to agree with the offeree, whilst acceptance simply connotes consent to the offer (Furmston et al. 2012, p. 50). In the instant contract, the agreement begins by narrating the nature of the agreement, its day of creation, the parties, and their names. One of the paragraphs in the second last page of the contract ends with a sentence that states the following: “NOW, THEREFORE, the parties hereto agree as follows:”

The use of the word “agree” in this part of the contract denotes and brings out the aspect of the contract being offered by the offeror and accepted by the offeree; thus, the contract is agreed between the parties (O’Sullivan & Hilliard 2012, p. 13). The parties are not in a position to agree about the contents of a contract on which no offer has been made and acceptance granted. In the same breath, this aspect brings out the element of consensus ad idem from the agreement, alternatively known as the meeting of the minds.

In other words, the use of the word ‘agree’ makes the excerpt qualified in the elements of offer and acceptance by proving that the contract was made in the full and clear understanding of its contents (Koffman & Macdonald 2010, p. 48). In the case of Scammel v Ouston [1941]1 All ER 14, the parties entered into an agreement for the purchase of a motor vehicle, with one party understanding the agreement to be one of hire purchase, while the other one believed that the purchase was instantaneous. When a dispute arose, the court ruled that there had been no consensus ad idem between the parties; hence, there existed no valid contract. Parties in the instant contract, therefore, prove to have the mental aspect of the meeting of their minds.

Subject matter and proprietary rights

The instant contract is made between the National Highways Traffic Safety Administration (NHTSA) and the Toyota Motor Corporation. It relates to an agreement between the two institutions to administratively find solutions to claims resulting from civil penalties charged for violation of federal traffic laws. In other words, it is an administrative agreement that seeks to create harmony in the approach to claims by both entities for better cooperation.

In essence, this contract properly falls under the law of contract (Koffman & Macdonald 2010, p. 101). The proper description of the subject matter in the contract, as done in the instant contract, is of utmost importance, as it creates certainty regarding the subject matter. It also avoids the contract from being challenged for ambiguity or nullity in case the terms are interpreted differently. In the contract, the roles and obligations of either party are set out in the document to ensure certainty and non-ambiguity. It is this element that makes a contract legally enforceable, as the interpretation thereof is ably done by the courts and remedies enjoyed therefrom (O’Sullivan & Hilliard 2012, p. 16).

Proprietary rights under the law of contract refer to the rights that are owned by a contracting party in the business agreement, which allow them to hold the ownership of the subject matter of the contract (Koffman & Macdonald 2010, p. 103). In the instant contract, the NHTSA bears the proprietary rights to the document, as it is the party from whom the fulfilment and performance of the agreement are sought by the Toyota Company.

This is an attribute that is characteristic of all contracts that are made properly under the law. The proprietary right in the subject matter of the contract which is held by the NHTSA is held by the party at his option, as the agreement seeks to acquire fulfilment from it. The agreement therein is to only have the effect of the law upon the full and valid performance of the contract by the parties. Obligations under the agreement rest on both parties to the contract. On the part of the NHTSA, amongst other things, the company through its secretary undertakes to compromise on the amount penalized under the law concerning Toyota Company and to hold a follow-up meeting with Toyota Company every month for six months after entering into the agreement, amongst other obligations.

On the part of Toyota Motor Corporation, the company, amongst other things, undertakes to restructure its business to merge its obligation in quality assurance and reform the issues it faces on road safety. Toyota also undertakes to review the quality of the products that it offers to the public to conform to the requirements expected to avoid safety-related accidents and bring down the numerous complaints and allegations that it receives. More importantly, Toyota undertakes, under paragraph 3 of the agreement, to pay a civil penalty of $17,350,000 to the United States as a requirement of the Safety Act, 49 U.S.C. These obligations on the part of either party validly bind the parties and form the subject matter of the contract.

Conditions and warranties in the instant contract

There exist two divisions within the terms in the contract in all the agreements that are valid under the law. These divisions are conditions and warranties. Conditions are fundamental promises in a contract, which a party therein undertakes to fulfil and they go to the root of the contract.

The question of what is to be regarded as fundamental to a contract is a question that is left to the assessment of the court whenever disputes arise. In the case of Poussard v Spiers and Pond [1876] 1 Q.B.D. 410, the court determined that a condition of a contract had been breached, where a musician had contracted to perform at a given entertainment joint and failed to do so one week after the season had started. The court stated that the agreement to entertain at the entertainment spot was fundamental to the entry of the parties into the contract.

The breach of a condition negates the entire contract, whilst a breach of a warranty merely affords a party a claim for damages (Beatson et al. 2010, p. 101). For example, if a contract has been made for the supply of goods, then supplying the goods is a condition because the breach of this aspect would negate the creation of the entire contract. Another example is the obligation to pay for goods and services rendered, or the obligation to deliver them on time, in the case of sensitive goods and services (McKendrick 2014, p. 42).

In the instant contract, paragraph 3 of the contract requires Toyota Corporation to pay a civil penalty of $17,350,000 to the US upon entering into the contract with the NHTSA. This particular condition may be inferred to be a condition of the contract, which determines whether the contract continues to operate or not. The payment is to be made at the initiation of the contract, as a consideration for the operation of the agreement.

As such, the payment is to be seen as a condition (Koffman & Macdonald 2010, p. 110). The failure to perform this part of the contract would negate the very essence of the contract between the parties (McKendrick 2014, p. 44). However, the mode of payment and the instalments through which the disbursements are to be remitted to the US arise as warranties because their breach does not necessarily mean that the contract is negated.

The agreement states that the payment is to take place at the time of the signing of the contract. If Toyota Corporation, for instance, pays two days after signing the agreement, then the same would only amount to the breach of a warranty and the court would rarely hold that the contract has been breached fundamentally at this point. In essence, the breach of a warranty is not as fundamental as that of a condition, as it simply changes the circumstances of the contract to the detriment of the other party. However, it does not serve to crumble down the entire agreement.

Dispute resolution

The instant contract bears no provisions for a dispute resolution mechanism between the parties. This is quite a rare occurrence, given that the execution of contracts is at times degenerated into a combative approach, especially where parties are reluctant to fulfil their obligations therein and disputes arise (Furmston et al. 2012, p. 54). The inclusion of a mechanism of dispute resolution in the contract binds the parties to the particular approach to resolving their disputes. It does not merely constitute a preference on which disputes are to be resolved. In most contracts, the process of arbitration is preferred as a means of dispute resolution.

Arbitration, which is a mode of alternative dispute resolution, entails the determination of disputes without having to resort to litigation. Parties in the contract refer the matter to a person known as an arbiter and they undertake to respect the decision of the arbiter. The arbiter, who is the judge of the process, is a third party who is trusted by the parties, neutral, and knowledgeable about the antecedents of the dispute.

The arbiter reviews the facts and the evidence of the dispute and decides on the matter (Beatson et al. 2010, p. 102). Nevertheless, this process does not oust the applicability of the laws of the country on the matter in dispute, as was held in the case of Czarnikow v Roth, Schmidt & Co [1922] 2 KB 478, where Scrutton LJ famously stated that the law would not allow contracts between persons to usurp the applicability of the law. In essence, the judge stated that arbitrators always had to apply the laws of the country. Therefore, the instant matter would still have the national laws applied to it, despite the arbitration clause.

Contract management practices

The arbitration process may be regarded as an effective contract management practice that seeks to manage the disputes arising from the contract by hastening the process of determination and resolving such disputes amicably and in the best interest of the contractors (Beatson et al. 2010, p. 160). It confines the contract to the opted form of dispute resolution, in the understanding that the alternative, which is litigation in the court system, may be adverse to the interests of the parties.

Litigation may tarnish names, take the parties through the stringent court processes that are arguably subversive of the course of justice and, more importantly, waste a lot of time and money. Hence, arbitration is required to be undertaken by the parties to protect the contract from external conditions. Therefore, the fact that the instant case does not foresee the occurrence of disputes and it lacks a dispute resolution clause clearly shows and proves that the contract lacks an effective contract management practice.

Conclusion & Recommendations

The instant contract relates to an agreement between the NHTSA and the Toyota Motor Corporation. The agreement is meant to organizationally find solutions to claims resulting from civil penalties emanating from the violation of federal traffic laws. The essay has interrogated several requirements within its creation and deciphered the theoretical underpinnings of legal requirements of contracts into practical examples. Offer and acceptance are requirements that are central to the establishment of any contract. These requirements have been established to exist in the agreement of the parties in the instant contract.

The proprietary rights in the instant contract have been seen to exist in the person who holds the title at the time of the contract. In this case, the title passes with the performance of the stipulated obligations under the contract. The seller passes the title to the buyer upon full performance. The essay further interrogated the differences between conditions and warranties in a contract about the instant agreement. Payment of the dues under the contract has been analysed as a condition, whilst the manner of payment may be breached and amount to a breach of warranty. Finally, arbitration has been looked at in two respects; as a dispute resolution mechanism and as a contract management practice that seeks to bind the parties.

The instant contracting parties ought to realize that disputes are akin to contracts, thus they include a dispute resolution mechanism that properly addresses the unique circumstances that characterize the contract. The mechanism should be able to expedite the dispute resolution process and create solutions to disputes to honour and sustain the contract.

Reference List

Beatson, J., Anson, W. R., Burrows, A. S. & Cartwright, J. 2010. Anson’s law of contract. Oxford: Oxford University Press.

Furmston, M. P., Cheshire, G. C. & Fifoot, C. H. S. 2012. Cheshire, Fifoot and Furmston’s law of contract. Oxford: Oxford University Press.

Koffman, L. & Macdonald, E. 2010. The law of contract. Oxford: Oxford University Press.

McKendrick, E. 2014. Contract law: text, cases, and materials. Oxford: Oxford University Press.

O’Sullivan, J. & Hilliard, J. 2012. The law of contract. Oxford: Oxford University Press.

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