Contract law regulates everything from buying a coffee to trading on the stock exchange.
A contract is An agreement between two or more competent parties in which an offer is made and accepted and each party benefits. Agreements can either be formal or informal, written, oral, or implied for example, by a long-term business relationship. Examples of contracts include leases, promissory notes, rental agreements, etc. There are four necessary components to make a contractual agreement; an offer, acceptance of the offer, the intention to enter into a legally binding agreement, and consideration.
The offer is a voluntary but conditional promise submitted by an offeror to another (an offeree), for acceptance. An ‘invitation to treat’ should not be mistaken for an offer. If an individual is not willing to implement terms, but merely seeking to initiate negotiations, this is not an offer but an ‘invitation to treat. Most adverts are invitations to treat, for example, items displayed in shops.
Acceptance of the offer
The next step in the formation of a contract is accepted. Acceptance may be communicated, orally, in writing, or inferred by conduct (for example, from a handshake). It is important to note that a counteroffer is not acceptance. A counteroffer is an offer made in response to a previous offer by the other party. Making a counteroffer normally automatically rejects the first offer, and needs acceptance under the terms of the counteroffer. For example, John offers to sell Pat his car for $600, and Pat makes John a counteroffer of $500. The original offer is no longer valid, and John can now accept the offer made by Pat or not.
Intention to enter the legally binding agreement
The final element needed for a contract is the intention to create a legal relationship. This is a fundamental pillar of contract law, whereby both parties must actively intend to enter into an arrangement that creates legally binding obligations. It is assumed that domestic arrangements do not have this intention to create a legally binding relationship. For example, a father offering to pay money to his son in exchange for an outstanding performance at school is outside the realm of contracts. This assumption holds tight for other family agreements. Agreements made by divorced or separated couples over the division of property tend to be exceptions to this rule.
The next aspect of a contract is a consideration. Consideration has been defined as something of value given by both parties to a contract that induces them to enter into the agreement to exchange mutual performances. Consideration must have a value that can be objectively determined. A promise, of love, is not enforceable because of the subjective nature of the promise. Consideration may be a promise to perform a certain act, for example, to fix a leaky roof, or a promise not to do something, such as build a second story on a house that will block the neighbor’s view. Whatever its particulars, consideration must be something of value to the parties to a contract.
Elements of forming a contract
A contract will not be considered valid in the eyes of the law if one of these elements is omitted, therefore each element is a vital part of forming a contract.
Using a scenario of your choice, apply the rules of offer and acceptance (consider the impact that new technology may have).
Law is not a static body of rigid rules, law is dynamic and must change in order to keep up with the times. The introduction of e-commerce or online shopping has been one of these changes that the law must adapt to.
An example of an online contract: If you wish to buy a Dell computer online the four elements of a contract are still needed. The computers available for sale on the Dell website are invitations to treat. The customer then chooses a computer and makes and accepts the offer by filling in the standard page available with personal details and valid payment details. The terms and conditions of a contract are available and acceptance of these terms must be agreed upon before the contract can become valid. This usually takes the form of a ‘tick the box to confirm that the customer has read and agrees to all of the terms and conditions of the contract. The consideration, in this case, is the money that is transferred through a credit card payment to Dell in exchange for the computer chosen. Dell then has the responsibility to deliver on the promises agreed upon in the contract, usually delivered within a specific time period.
There have been some issues as to whether a click can substitute a signature, and fraud has been a problem. However, this is a commonly used acceptable form of forming an online contract. Proposed UCC 2 -212 states that “If an offer in an electronic message evokes an electronic message in response, a contract is formed”.
Assess the importance of the rules of intention and consideration of the parties to an agreement.
Rules of intention to enter into a legally binding agreement and consideration are two elements that need to be apparent before a contract will be seen as valid in the eyes of the law.
Consideration is the idea of value in law. It can be a promised action or the omission of an action that the parties to a contract agree upon. Consideration can take the form of money, physical objects, or forbearance of action. For example, if Mary sells her car to Pat for $550, the consideration from Mary is the car and the consideration from Pat is the $550. However, if Mary sells her car for $0, the consideration from Mary is the car but Pat has given no consideration and therefore the contract will not be recognized as being valid in a court of law. Mary can also agree to sell her car in return for Pat working at her company for a month. Consideration alone is not enough to create a legally binding contract, the parties must also have the intention to create legal relations.
Rules of Intention
Rules of intention refer to the final element necessary for a contract. This intention to enter into a legally binding agreement needs to be established because, if contracting parties don’t consent to the legally binding relationship the contract is not enforceable. Often, the intention to create legal relations is expressly stated by the contracting parties. In other situations, the law will readily imply the intention, because of the nature of the commercial dealings between the parties. This is normally divided up on the basis of commercial matters, and domestic/social matters. It is assumed that for the former, parties intend to create a legal relationship, and for the latter, parties do not intend to create this legally binding relationship. Both assumptions can be overturned by evidence of the contrary. The presence of consideration normally indicates this intention, although there are always exceptions.
The legal capacity of persons
The legal capacity of persons refers to their status or capability to enter into a legally binding agreement. The law can limit or bar certain groups of people from engaging in certain activities, such as entering into legally binding contracts. In doing so, the law aims to protect the weaker or vulnerable members of society.
Individuals wishing to enter into a contract must be seen to have:
- Decision-making capacity – understanding relevant information, appreciating consequences of a decision, acting voluntarily, autonomously, and communicating decisions.
- Reflective capacity – ability to assess one’s situation and future possibilities.
- Personal identity – an individual is recognized as a subject, and the same person through time (excludes persons who have guardianship.
Persons who are deemed incompetent due to physical or mental illness lack the capacity to enter into contracts. Minors, which refers to persons under the age of 18, may not enter into most contracts, especially long-term contracts, or contracts involving large sums of money. Intoxicated people are also excluded from being allowed to enter into contracts as it is assumed that they do not possess the necessary rationale to understand the consequences of entering into a contract.
A contract is voidable if the intoxicated person is not capable of understanding the transaction, however, this contract will become enforceable if the drunk ratifies the contract once sober. Directors are not allowed to enter into a contract outside of the corporate objectives of the company he or she works for.
The legal capacity of an individual is a necessary element for a contract to be valid, to ensure the awareness of the terms and conditions and future consequences of the contract.