Creating of a Legally Binding Contract - Essay Example

Abstract This document discusses the important features of the formation of a legally binding contract. It tells that how an offer should be made and how it should be followed by acceptance. The importance of consideration and intention to create legal relations is also discussed. It Also explains how parties are discharged from the contract and what remedies are available when there is a breach by any party. Keywords: Contract, Offer, Acceptance, Competence, Consideration, Intention to create legal relations, Counter offer, Tender, Damages, Remedies. The formation of a legally binding contract requires an offer to be made properly which should be accepted properly. An offer once accepted becomes a promise and when it forms a consideration for the parties, it becomes an agreement. When the parties to an agreement have an intention to create legal relations, the agreement becomes a contract. A legally binding contract gives legal rights to a party to a contract in case of breach of a contract by the other party. Let us take a deeper look at the formation of a contract. The most important thing is the competence of the parties to enter into a contract. Every person is competent to contract unless he is a minor or of an unsound mind. A contract with a minor is not a valid contract. Also, it cannot be validated by ratification by a minor when he reaches the age of majority. Simon and Davina can be easily assumed to be of the ages of majority. A contract with a person of unsound mind is also not a valid contract. There are some people who are occasionally of sound mind and occasionally of an unsound mind. The contracts made with them at the time of their sanity are valid contracts. However, the burden of proof falls on the party which contracted with such a person that he was of a sound mind when he entered into the contract. The first ingredient of a legally binding contract is an offer. When a person signifies to another person, his intention to do something or refrain from doing something in return of a promise that the other person would do or refrain from doing something, the first person is said to have made an offer to the second person. The first person would be called an offeror or proposer and the second person would be called an offeree. An offer should be made properly. It should be communicated to the offeree. There should not be any ambiguity in the terms of the offer i.e. the terms should be definite, clear and easy to understand. In Guthing v Lynn [1831] 2 B & Ad 232, 9 LJOSKB 181, the buyer of a horse promised to pay extra £5 “if the horse is lucky for me”. It was held that this promise was not enforceable as the statement was too vague to explain that in what way the horse was required to be lucky. An offer may be made generally to a variety of people or it may be made specifically to a particular person. It may contain a condition for acceptance which must be fulfilled for a valid acceptance. In this case, Simon is in the process of negotiation with Davina. It can be said that Simon’s offer to Davina is wide and open. He has made the offer of hiring Davina as a mentor to support the finalists of his TV program “Your Hired”. It is assumed here that Simon has offered Davina a definite sum of money for her services. Proper acceptance of the offer is very important for a formation of a legally binding contact. Acceptance must be communicated to the offeror within the stipulated time—if any—or within a reasonable time. An acceptance which is not made in time is not a valid acceptance. Also, offeror is not bound to keep the offer open unless his offer to keep the offer open is backed by a consideration. In Dickinson v. Dodds [1876], 2 Ch. D. 463 (C.A.), Dodds offered to sell some property to Dickinson for £800 on Wednesday and offered to keep the offer open till Friday at 9 A.M. But he sold the property to a third party on Thursday and Dickinson knew that Dodds had changed his mind well before the transaction was executed. It was held that Dodds had a right to sell the property because his offer to keep the offer open was not backed by any consideration. This case also reflects that the proposer has a right to revoke his offer at any time before its acceptance. It cannot be revoked after it has been accepted. The acceptance must also be absolute and not qualified i.e. it must not be conditional. If the offeree makes a conditional acceptance, he is said to have made a counter-offer. A counter offer cancels the original offer and it’s acceptance by the proposer leads to a formation of a fresh contract. In Hyde V Wrench [1840] 3 Beav 334, it was held that the offer was rejected by way of a counter offer by the offeree. The defendant offered the plaintiff to sell his farm for £1200 which was declined. A few days later, the defendant made another offer to the plaintiff to sell the same farm for £1000. This offer was responded by a counter offer from the plaintiff, offering to buy the farm for £950 which was refused by the defendant. The plaintiff accepted the offer of £1000 but the defendant refused to sell. There was no contract between them because the offer of £1000 was rejected by the plaintiff when he made a counter offer. In this case, the parties are in the process of negotiation. During negotiation, there is a chance that many counter offers would be made. If the parties are interested, they original offeror would make new offers. They might reach at a point where an offer is accepted or a counter offer is accepted. The contract thus formed would be governed by the terms of the offer and acceptance on the basis of which it is made. The previous offers and counter offers would be disregarded. Acceptance must be communicated to the offeror. It is deemed to have been communicated when it is communicated by an authorized person. Communication by an unauthorized person would not lead to the formation of a contract. If the offeror has specified a specific mode of communication for acceptance then it must be made in that mode only. In this case, Davina, being the offeree, must accept the offer of Simon within a reasonable time. No specific mode of communication is specified here. On the other hand, Simon should also keep in his mind that since it is in his knowledge that Davina is considering a range of other business opportunities, she can back out of the negotiation process at any time before her acceptance. Thomas v. Thomas [1842], 2 Q.B. 851, 114 E.R. 330., would be applicable again if Simon hires someone else for the job as it is likely that there would be some other options for him too. Simon is not bound to hold the offer open for her unless Davina provides Simon with a consideration to hold the offer open. When the offeree accepts the offer of the proposer, a promise is created. An agreement is a promise or a set of promises that form consideration for each other. Consideration is an important element for the formation of an agreement. It is the price of the object offered for sale or services offered to be rendered and vice versa. The law does not require a consideration to be adequate in terms of market rate but it requires that something should be there to serve the interests of both the parties to a contract. In Thomas v Thomas, it was held that an annual rent of £1 and a promise to keep the property in good repair was sufficient consideration for the promise to be provided with a house. There are a few exceptions in which a legally binding contract can be formed without a consideration. However, in this case, consideration is necessary. Simon’s consideration is the rendering of services by Davina and Davina’s consideration would be the reimbursement of her services in monetary terms. An agreement without consideration is of a social nature and is also known as a domestic agreement which cannot be transformed into a contract. Consideration is the base of creating legal relations. Therefore, it should be legal. If the object of a contract is illegal, then the contract is void ab initio. In this case, the object of the contract in the process of formation is legal. However, it is necessary to determine what the consideration would be exactly for each of the parties. If the parties decide that the agreement between them is enforceable by law then their agreement becomes a contract. As a contract is legally binding on both the parties, in case of a breach of contract by any party, the other party has a right to go to a court and enforce the promises made under the contract. There is one very important thing to know that all contracts are agreements but all agreements are not necessarily contracts. The lack of intent to create legal relations bars an agreement from becoming a contract. Agreements are also of a social nature and not contracts if they are not legally binding. In Simpkins v Pays [1955] 1 WLR 975, a landlady and her tenant had intended to be legally bound by jointly entering a competition and share any prize won, it was a contract. In this case, Simon wants to enter in a legally binding and a professional contract. As Davina has just recently executed a contract with Channel Four which is almost a similar organization, it can be implied that she understands that her agreement with Simon would be legally binding. It is given that Simon really wants to hire Davina and wants to ensure that Davina is unable to renege on their agreement. Simon has to be really careful here as he should obtain a free consent of Davina for the formation of a contract. It means that her consent should not be obtained by duress, undue influence, or misrepresentation. Misrepresentation can be of a fact; Krakowski v Eurolynx Properties Ltd [1995] 183 CLR 563. Sometimes, a representation is true when it is made but becomes untrue when a contract is made due to change in circumstances. In such cases a representation needs to be true at the time of making of the contract. If Simon makes a representation or uses duress, the contract formed would be a voidable contract and Davina would not be legally obligated to perform her part of the contract. Mistake is excluded from the aforementioned list of free consent detriments because sometimes a contract is declared as voidable due to a mistake by a party. However, if there is a mistake by both the parties, then the contract would be void ab initio due to lack of consensus ad adem i.e. both parties agreeing to the same thing in the same sense. Simon should declare his terms clearly about what he is offering in return of the services rendered by Davina. He should not use duress to make her enter into an agreement. Their relationship is not such that it can be presumed that Simon could have used undue influence. If he uses undue influence, the burden of proof of usage of such influence would be on Davina. Simon has to refrain from fraud as the contract formed as a consequence would be voidable at the option of Divina. Therefore, Simon has to be really careful as a contract voidable at the option of Davina is not the type of relation he wants. He wants to stop Davina from reneging from his deal and only a legally binding contract would serve this process. As Simon wants to enter in a professional contract with Davina, he might be willing to discharge him from certain liabilities through exemption clauses. An exemption clause exempts and a limitation clause limits the liability in certain cases. Such clauses must be clearly brought to the attention of the other party. As both Simon and Davina have sufficient experience in the same field, there would certainly be some clauses which could be implied. These clauses must be brought to the attention before the parties have entered into an agreement. Otherwise, the clause would not be applicable. However, the law does allow exemption clauses which are written on the document of the contract which is signed by the parties. It is implied that the signing party has read the document carefully before signing it. The execution of a contract discharges both parties. Both parties perform their promises and the contract is executed. However, if any of the parties defaults in the performance of the contract, the law empowers the other party to demand performance from the party. If the party refuses to perform the promise, then the other party can go to the court against him. The promises must be performed in the stipulated time or within a reasonable time if no specific time is set. A party must offer performance to the other party which is also called a tender. A tender must be legal which means that it must be given at a reasonable time at a reasonable place. For instance, a tender given within the working hours at the place of business of the other party is a legal tender. If a party refuses to accept a legal tender, the other party is no longer bound to perform its promise. Similarly, if a party is stopped from the performance of its promise by the other party, it is discharged from the contract automatically. If a party decides to go to court upon default by the other party, it can claim damages. The damages claimed should not be too remote. The damages should only be those which have arisen due to the breach of contract by the other party. In Hadley v Baxendale [1854] 9 Exch 341, there was a delay by the defendant in taking the plaintiff’s mill shaft to London. The delay was due to defendant’s mistake and it caused a loss of profits to the plaintiffs. It was held that the loss was too remote and could not be granted as damages. Therefore, if there is a contract between Simon and Davina and Davina attempts to renege on their deal, Simon would not be able to claim damages for the loss of profits, if any. Also he would be granted quantifiable damages only. If Simon and Davina agree to reimburse a certain amount of money to each other if any of them attempts to renege on the deal, then Simon would also be able to claim these damages. Such damages are called liquidated damages. However, it would be Simon's duty to make all the efforts that he can to minimize the losses that he would sustain. He would not be granted the remedy of specific performance because it is not granted in employment related matters. Rescission is possible if the court is satisfied that it would be adequate. There is another remedy available which is called Injunction. It is meant to stop a party from doing something. It is also not applicable to employment related matters. Simon needs to make the best out of his negotiating skills and persuade--legally and without misrepresentation--Davina to enter into a contract. Once a contract is made, it is not possible for a party to renege from it except by the consent of the other party. Both parties have to perform their promises made under the agreement to discharge a contract. If Davina enters into a legally binding contract and tries to renege from it afterwards, Simon can sue for damages. Assuming that Davina is a person of reasonable prudence, she will be aware of her duties and would try not to renege from their deal. Bibliography 1. Dickinson v. Dodds [1876], 2 Ch. D. 463 (C.A.). 2. Guthing v Lynn [1831] 2 B & Ad 232, 9 LJOSKB 181. 3. Hadley v Baxendale [1854] 9 Exch 341. 4. Hyde V Wrench [1840] 3 Beav 334. 5. Krakowski v Eurolynx Properties Ltd [1995] 183 CLR 563. 6. Simpkins v Pays [1955] 1 WLR 975. 7. Thomas v. Thomas [1842], 2 Q.B. 851, 114 E.R. 330. Read More