Formation of a Contract

Introduction

Contract law is about “keeping promises”. However, not every promise can constitute a contract. The purpose of contract law is to set out which promises will be regarded as legally enforceable contracts. Contracts can be made in writing, orally or by conduct.

To establish an enforceable contract, there are five main elements: Offer, Acceptance, Certainty of Terms, Intention to Create Legal Relations and Consideration.

  1. Offer

An offer means a reasonably clear statement showing that the seller intends to make a binding agreement with the buyer. For instance, “I will sell you this phone for $8,000” is an offer. Any statement that a reasonable personal would regard as an offer will be an offer.

In exceptional cases, an advertisement or shop display can also constitute an offer if a reasonable person would interpret it this way, e.g. “these items are $100 each to the first 10 customers.

2. Acceptance

An acceptance means reasonably clear words or unambiguous conduct showing that the buyer intends to accept an offer. Thus, a formula of words which would be reasonably understood as a mere inquiry or request for more information is not acceptance. An acceptance has to be unconditional, meaning it must not attempt to introduce new terms into the agreement.

3. Certainty of Terms

The contract terms must be reasonably certain enough to be carried out. If the terms are not reasonably certain to be carried out, the contract will be void. Thus, a contract must contain complete terms with reasonably sufficient certainty. Clear contract drafting is key to avoid future complications.

An agreement between 2 parties to enter into an agreement by which some critical part of the contract matter is left to be determined, is no contract at all”

(May & Butcher Ltd v R [1934])

3. Intention to Create Legal Relations

Both parties must have an intention to be legally bound.

There are two rebuttable presumptions regarding the intention to create legal relations:

3.1 Agreement of a domestic or social character

These generally do not involve an intention to create legal relations. If the contract is made amongst close family members, it’s presumed the parties do not have the intention to be legally bound. For example, when a father makes a promise to buy a car for his son, if he obtains First Class Honors in law school, this promise is only a family arrangement and generally will not be regarded as a contract.

3.2 Agreement of a commercial character

These generally do indicate an intention to create legal relations. This presumption helps reinforce commercial certainty. If the contract states it’s “subject to contract”, then the promise will not constitute a contract even if made under a commercial context. “Subject to contract” means the promise is not intended to be a binding contract until a formal contractual document is formed.

4. Consideration

Consideration is the price of the bargain. There are three essential elements in consideration.

  1. Must be sufficient, but need not be adequate (meaning that it does not need to be a fair or market price);
  2. Must not be in the past;
  3. Must move from the promisee (the person who receives a promise) at the request of the promisor (the person who makes a promise).

Consideration takes the form of money in most contracts, and usually curtails a benefit and detriment for each party. For example, a promise to pay $8,000 in exchange for a promise to sell a smart-phone is good consideration.

Where a start-up company or the director receives capital  or assets without the exchange of their consideration, it would be considered a gift. That is, a voluntary transfer of property from one to another, without something of value promised in return. The failure to give this gift cannot be enforceable as breach of contract because there was no consideration for the promise given in return.

Conclusion

A contract is not merely a promise. It is a legally enforceable agreement. To form a contract, the parties must make it legally enforceable. The four elements which the parties must establish to make the agreement legally valid and enforceable are: (1) meeting of the minds; (2) certainty of terms; (3) intention to create legal relations; and (4) consideration.

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