1.1. Explain essential elements of valid contract according to contract law.

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Executive summary

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Table of Contents

Task 1

TASK 2

Task 3

Task 4

Conclusion....................................................................................................................49-49

Reference......................................................................................................................50-50

Task 01

1.1.            Explain essential elements of valid contract according to contract law.

A contract is a legally binding or valid agreement between two parties. A contract is an agreement which will be enforced be the law. This Definition is satisfied when the following elements are present:

There must be an agreement. Since nobody can agree with himself (though he may resolve to do or do an act), there must be at least two parties to an agreement. One of them will make an offer, and other in every respect, there is agreement between the parties.

The parties must intend their agreement to result in legal relations. This means that the parties must intend that if one of them fails to fulfil a promise undertaken by the agreement, he shall be answerable for that failure in law. It is evident that not all agreement is intend to produce legal consequences.

If, for example,

John agrees to lend his cycle to his friend Arun but later refuses to let him have it, an action for damages will not lie against John because the two friends did not con-template, when entering in to the agreement, that it should be enforceable in law. Similarly, if a father fails to pay his son the promised pocket money, it is obvious that the son cannot sue the father. The former agreement is of purely social character, the latter is a domestic arrangement. Neither of these agreements qualifies as a contract.

·         English law is not content with these two requirements. It requires further that either consideration must be present or that the contract should be in a deed.

·         The parties must have capacity to contract.

·         The reality of the contract must not be affected by circumstances which render the contract unenforceable, voidable, void or illegal.(charlesworth’s business law fifteenth edition Paul Dobson Clive M.Schmitthoff p.3)

Formation of contract

The essence of contract is that there should be an agreement between the contracting parties. This agreement is normally constituted by one party making an offer and the other indicating its acceptance. The acceptance must correspond to the offer in all material aspects. The negotiations between the parties need not always lead to a contract. Inquiries may be made or offers invited but no offer may be made or, if one is made, it need not be accepted. Before the concepts of offer and acceptance can be considered in detail, it is necessary to distinguish certain statements preliminary to the offer from the offer itself. (Charlesworth’s business law fifteenth edition Paul Dobson Clive M.Schmitthoff p.11)

§  Offer

An offer is a definite promise to be bound by specific terms. It can be defined as–an n expressed or implied statement of the terms on which the maker is prepared to be contractually bound if it is accepted unconditionally. An offer can be made to a single individual, to a class of person or even to the world at large. The offer can be accepted only by the person or one of the persons to whom it is made to. The person who makes the offer is referred to as the “offeror” and the person to whom the offer is made to is referred to as the “offeree”

§  The Acceptance

‘A positive act by a person to whom an offer has been made which, if unconditional, bring a binding contract into effect.’ The contract comes into effect once the offeree has accepted the terms presented to them. This is the point of no return; after acceptance, the offeror cannot withdraw their offer and both parties will be bound by the terms that they have agreed. Acceptance may be by express words, by action or inferred from conduct. (Charlesworth’s business law fifteenth edition Paul Dobson Clive M.Schmitthoff p.17)

§  Consideration

Consideration is an essential part of most contracts. It is what each party brings to contract. A valuable consideration in the sense of the law may consist either in some right, interest, and profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other. “From Currie v Misa 1875”

Example of consideration

Arun promises to give Baron GBP 100. Baron has to give nothing in return. As there is no consideration, this is a graduations promise and not legally enforceable.

Valid consideration

·         Consideration may be executed (an act in return for a promise) or Executory (a promise in return for a promise). It may not be past, unless one of three recognized expectations applies.

·         There are two broad types of valid consideration – executed and Executory. If consideration is past then it is not enforceable.

·         Executed consideration is an act in return for a promise. The consideration for the promise is a performed, or executed, act.

·         An offers reward for the return of lost property, his promise becomes binding when B performs the act of returning A’s property to him. A is not bound to pay anything to anyone until the prescribed act is done. Therefore in Carlill’s case, the claimant’s act, in response to the smoke ball company’s promise of reward. (ACCA, Corporate & business law p.68)       

§  Intention to create legal relations

An agreement will only become a legally binding contract if the parties indented this to be so this will be strongly presumed in the case of business agreement but not presumed if the agreement is of a friendly social or domestic nature.

§  Legal capacity of the parties to act

Not all people are completely free to enter into a valid contract. The contracts of the groups of people listed below involve problematic consent, and are dealt with separately, as follows:

·         People who have a mental impairment;

·         Young people (minors);

·         Bankrupts;

·         Corporations (people acting on behalf of a company); and prisoners.

§  People who have a mental impairment

Generally speaking, people are free to enter into contracts even though they may have a mental impairment, or are temporarily disabled by drugs or alcohol. They are, however, sometimes vulnerable to being bound by contracts they do not fully understand. The question of capacity to make the contract often arises only after the contract is in place. People with disabilities and their advocates will find some protection in the rule that a contract is not valid and enforceable unless there was genuine consent to its making. Capacity to give consent involves a general understanding of the nature of the contract (not necessarily its fine details). A person with a mental impairment, for example, may have the capacity to understand some contracts (for example, buying a loaf of bread), but not to understand other, more complicated contracts (for example, buying a car on credit). Where a person with a disability did not understand the general nature of the contract, a court can intervene to set aside the contract only if: The other party knew (or ought to have known) of the disability or lack of capacity and it would be unfair for them to take advantage of that; and The benefit received by the other person has not been sold to a third party who did not know the previous transaction might not be valid. Generally, to escape the consequences of a contract, the other party should be notified of the intention not to be bound by the contract within a reasonable time.

§  Binding contracts and young people

Contracts for the supply of "necessaries" will generally be binding. There are no hard and fast rules to identify what is "a necessary", but it does include the sorts of things the young person needs to live a reasonable lifestyle. It includes basics such as:

·         Food

·         Clothing

·         A place to live

·         Medicine And so on.

It will also include any contracts relating to the young person`s education, apprenticeship or something very similar, if it can be shown to be of benefit to the young person. While a court has not yet considered the issue specifically, mobile phones are probably not necessaries. The young person contracting in this situation will be held bound to pay a reasonable price (although that may not be the contract price) for necessaries actually sold and delivered. ("Delivery" is a technical term. Generally, delivery takes place when the seller has given the buyer the power to take the goods away.) Where necessaries have been sold but there has been no delivery, the young person does not have to take delivery or pay for the goods.

§  Non-binding contracts and young people

Two classes of contracts are not binding on a young person, namely:

·         Contracts which are not for necessaries; and

·         Contracts for the repayment of money lent or to be lent (that is, any form of credit contract).

Where a young person has already paid money under a non-binding contract, that money will not be recoverable unless no benefit has been received by the young person. The young person can, however, refuse to make any further payments under the contract. It is not certain who then own goods that are not necessaries. It appears that they become the property of the young person unless the young person has fraudulently misrepresented their age. Even after turning 18, a person cannot confirm a prior contract and then become bound by it. Any money paid by a young person under such circumstances may be recovered.

Bankrupt people are not deprived of their general capacity to contract. During their imprisonment, prisoners may enter contracts, including contracts to buy and sell prison still apply, so that the permission of Corrections Victoria is required before a prisoner may sign for, deliver or receive any document.

§  Consent of the Parties

Entering into a contract must involve the elements of free will and proper understanding of what each of the parties is doing. In other words, the consent of each of the parties to a contract must be genuine. Only where the essential element of proper consent has been given is there a contract which is binding upon the parties. The ultimate consequences of establishing that no proper consent was given to enter the contract are matters dealt with when considering remedies for breach of contract. Proper consent may be affected by any of the following matters:

·         Mistake;

·         False statements;

·         Duress; and

·         Undue influence/un-consiconability.

ü  Mistake

Only a few types of mistakes will cause the contract to be non-binding on the parties to it: they must be mistakes that go to the very basis of the agreement. For example, where there is a contract for the sale of a car that both parties assume to exist, although in reality it has been destroyed by fire, this contract is non-binding on the parties. By contrast, where the parties are only mistaken about the model of the car, then this contract would be binding.

Another example is when a person signs a written document mistakenly believing that it relates to something entirely different from what in fact it does relate to, in this case the