A contract is an agreement between parties. It is binding in law. It means the rights and obligations of the parties under a contract may be enforced by the courts. Sometimes, the courts may force the performance of contractual obligations by the party in default. Usually, the court may award damages for breach of contract.
The following are the four basic elements that must be present for a valid contract.
3. Consideration, and
4. The intention to create legal relations.
Usually, several rounds of negotiations take place between the parties, before an agreement becomes binding and a contract is formed. It is very important to know the exact moment when a contract is formed. At this precise point, the parties accept contractual obligations and the consequent risk of liability if any party breaches the terms of the contract.
An offer is a statement of willingness by one party to enter into a contract with the other party. It is comprised of specific and clear terms. The offer must be a complete one. Also, it must be specific and capable of being accepted. It must include the fundamental terms of the agreement having the intention to create the contract. There should be no further negotiations to take place. An offer can be “express” – for example, if A tells B she will sell her television set for Rs: 50,000.00. An offer can also be “implied” from conduct – for example when a customer brings goods to the cashier of a supermarket.
Invitations to Treat
An invitation to treat is different from an offer. It only invites the other party to make an offer and is not considered binding. An example of an invitation to treat is an advertisement of goods for sale, with a price attached, in a shop window. Under the law of contract, as an invitation to treat, the customer cannot insist on buying such an item on display. And, the shop would not be obliged to sell the item at the price indicated. Circulars, catalogs, and price-lists would also normally be viewed as invitations to treat.
Termination of Offers
An offer may be revoked or terminated;
- after elapsing a reasonable period. It is better to include in the offer what is meant by a reasonable period. It avoids uncertainty in the time limit;
- if the offer is withdrawn or revoked before acceptance. However, this withdrawal or revocation must be communicated to the person or persons to whom the offer was originally made;
- when the person to whom the offer was made rejects the offer. The offer then lapses. The person to whom the offer was made originally cannot afterward change their mind;
- when the person making the offer dies;
- if any condition of sale is not fulfilled.
After acceptance of the offer, a fully binding contract is formed. The acceptance must be final and unqualified of all the terms of the offer. The offer must accept without announcing new terms. If all the terms of the offer are not accepted or new terms are announced then this is considered as a counter-offer. A counter-offer rejects the original offer. If the terms of the counter-offer are accepted, however, then these become the terms of the contract.
Acceptance does not take place until communicated to the person making the offer. The contract is formed at the moment when acceptance is communicated back to the party who made the offer.
Main rules governing the communication of acceptance
Two main rules are governing the communication of acceptance:
- Reception Rule – the contract is formed when acceptance is received by the person making the offer. This applies to instant forms of communication such as phone calls.
- Postal Rule – this applies when it is reasonable to use a form of delayed communication such as the post. Under this rule, acceptance is considered as communicated as soon as the letter of acceptance is posted. It remains effective even if the letter is lost, delayed, or destroyed. The letter must however be properly posted and addressed.
It is sensible to make provision in the terms of the offer as to the method and timing of the acceptance of the offer to avoid the use of the postal rule. At the moment no statutory or common law rules have been established to govern acceptance of an offer by e-mail. If no method of communication is specified then acceptance may be communicated by any method. However, if the method of communication of acceptance has been specified, then the offer can only be accepted in that manner. If acceptance is attempted to be communicated differently, then this would amount to a counter-offer.
For enforcing an obligation under a contract, there must be a consideration. Obligations can only be enforced if the party who wants to enforce that obligation has given or promised something in return. All parties to a contract must provide consideration. If no consideration has been provided by a party, then the contract will only be enforceable if it is made as a deed. The courts will not normally be concerned with the fairness of the contract or the adequacy of the consideration if the consideration mentioned has some value.
The person to whom the promise is made must have provided consideration. He must do, give or promise something in return for it. For example – X cleans Y’s car and Y gives X Rs: 100 in return.
Consideration must not be past. Something, has been already done, given, or promised before the formation of the contract is not to be considered as consideration.
Intention to Create Legal Relations
Sometimes parties may make an agreement without any intention of legal binding. Those agreements will not be regarded by the courts as a contract. However, in commercial agreements, there is a presumption that the parties expect the agreement to be legally binding. To negate this presumption, a party will have to produce clear evidence to that effect.
Examples of no intention to create legal relations are advertisements in which vague and extravagant claims are often made in order to attract customers. Another example is domestic agreements between husbands and wives or parents and children and other social agreements between friends such as an invitation for dinner. However, there may be certain situations in which advertisements, domestic agreements, and social agreements could be regarded as legally binding. An example of this would be where members of the same family have a business relationship with another.
Certainty of Terms
The terms of a legally binding contract must be certain. It is an essential factor. Terms cannot be unclear, ambiguous, or incomplete. Although there is a clear intention to create legal relations, if the terms of the agreement are unclear then it cannot be considered as a legally binding contract. However, the courts sometimes try to interpret uncertain terms in a way that makes them more certain. For example, it is done by reference to trade custom or previous dealings between the parties. However, outcomes of these situations depend on the specific facts of the cases.
Written or Oral
A contract does not always need to be in writing. There are circumstances in which an oral contract will be legally enforceable. It is however sensible to record all the terms of the contract in writing. So both parties know the terms agreed whilst at the same time clarifying points of potential ambiguity between the parties. Another important thing is the written terms can be used in evidence in the event of a dispute. Where a contract is written each statement in that written document is a “term”. The written document is regarded as the whole contract.
If the contract is an oral, or partly oral and partly written, then all the statements that have been made have to be looked at by the court to decide whether they are actual terms of the contract or mere representations. However, in certain circumstances law requires written contracts. These include guarantees, share transfers, assignments of certain intellectual property rights (e.g. a trademark), and most contracts relating to land.
Discharge of Contracts
Mainly there are four methods, by which a contract can be discharged.
– agreement, or
A contract is discharged when all the parties have performed all their obligations under the contract. If a party decides not to perform its contractual obligations then it is not discharged from such obligations but remains bound to perform them. Refusal to perform may amount to a breach.
When a party fails to perform some or all of its obligations under the contract, the contract is considered as breached. Another situation for breached contracts is when a party performs an obligation defectively or indicates in advance that they will not be performing as previously agreed. Any breach permits the innocent party to bring a claim for damages for any loss suffered.
This is where the parties agree to terminate the contract in order to release one or both parties from the agreement. It can also take the form of a change in the contract terms. An agreement to change the contract is another binding agreement. But it has to be made by a deed or the promise must be backed up by consideration.
Sometimes, subsequent events occur which is not due to the fault of either party, and these events make the contract impossible or difficult to perform. Then the contract is considered as frustrated. In a frustrated situation, the parties are no longer bound to perform their obligations.
Many situations can create a contract difficult or even impossible to perform. However, only in certain circumstances, the contract is regarded as frustrated. One situation is the frustrating event must occur after the contract has been formed. And neither party must be at fault. Another situation is the frustrating event must strike at the root of the contract. And it must render further performance impossible, illegal, or totally different from that planned by the parties at the time the contract was made.
Examples of frustrating events are as follows.
– the destruction or unavailability of the subject matter of the contract,
– illegality of performance – for example following a change in the law,
– personal incapacity in a personal services contract.
A contract is not usually discharged by frustration if the contract has simply become more expensive to perform or an alternative method of performance is possible.
A frustrated situation automatically discharges the parties from their future obligations. No party can claim damages for non-performance. It is because neither party is to blame for the fault.
Discharge of a Contract by Challenging its Validity
The validity of a contract can be challenged on a number of grounds such as public policy, mistake, illegality, or duress.
Contracts to commit crimes are void for reasons of public policy.
As a basic rule, an illegal contract will be unenforceable by either party.
In certain circumstances, a contract may be set aside due to a mistake made by the parties to that contract.
A contract is voidable by the injured party when it is induced by duress – which is actual or threatened violence or unlawful restraint. However, the injured party can choose to affirm or discharge the contract. Economic duress also makes a contract voidable if the injured party has been forced into the agreement.