Formation of a Contract - Essay Example

Formation of a Contract Formation of a Contract 1 An agreement arrived at by two or more parties with the intention of making itlegally binding is referred to as a contract (Burrows 2009, p. 104). The agreement, which also forms a contract’s first requisite, consists of an offer and acceptance, with the offeror making an offer and the offeree accepting it. Whereas an offer expressly implies the offeror’s willingness to be bound by the contract if conditions are met once the offeree accepts the offer, an invitation to treat merely invites offers that the offer can either reject or accept. Examples of invitations to treat are tenders, auctions and advertisements. An acceptance entails the final approval of terms of the offer. The basic rule that governs the binding of a contract is that the offer must receive communication of the acceptance of the offer before a contract can come into existence. With reference to the case file Powell v Lee (1908) 99 LT 284, the communication must be made by the offeree or their authorised agents (Burrows 2009, p. 69). Acceptance on the offeree’s behalf without authorisation is not valid, in the same way as the offeror may not compel a contract upon an unwilling offeree based on the assumption that silence (the offeree’s) denotes acceptance. Then, the offer must be matched by the acceptance, which implies that the offeree is in agreement with all the offeror’s terms. In the event that the offeree has varied or introduced the new term in their reply to the offer, it does not qualify as an acceptance, and a contract cannot be made. Termed as a counter offer, the offeror can freely accept or reject it. The rules of offer and acceptance further provide that if a condition is put on the acceptance by the offeree, known as conditional acceptance, then it is not deemed as binding. The termination clause provides that a binding contract is entered into once a contract is accepted, and that the offer may also revoke it at any time before it is accepted. 1.2 A valid contract must contain several essential elements if it is to be enforceable and they include an offer; acceptance; consideration; legal relationship; free consent; and competent parties (Martin & Law 2006, p. 269). Analysing the details of the first three, an offer will be comprised of a promise to effect an action while acceptance will be the acknowledging and accepting to perform the action. Consideration will be an item of material value, for example, money as agreed upon by the parties involved in return for the action. However, the consideration must also be lawful and involve lawful objects within a legal relationship. An invalid offer and acceptance is one that does not gratify one or more of the above terms. Focusing on consideration as an example, if the medium, amount and mode used is prohibited by law, the contract is illegal and, therefore, not valid. A general rule in the English courts is that illegal contracts will not be enforced and in some cases may not receive any remedy for damages arising from them. For example, David Taylor & Son v Barnett Trading Co. case of 1953 showed the consequences of an offer and acceptance that was invalid from the time of formation because it was illegal (Austen-Baker 2000, p. 98). The trading company had agreed to deliver Irish steak to David Taylor for the period starting April to July at a price they had set and agreed on. However, there was a legal order in force that prohibited the selling or buying of meat above a certain stipulated price on the date the contract was sealed. The price the two parties agreed on was above the legal limit. The trading company breached the contract by failing to deliver, and Taylor sued, upon which the company was ordered to compensate him. However, the verdict was reversed by the Court of Appeal citing the illegality of the contract because of exceeding the legal price limit and effectively making the contract invalid. 2.1 The intention or willingness to get into a legally binding contract or agreement creates a platform that shows the intent to create a legal relation, which is among the elements necessary in the formation of a contract (Burling 2011, p. 42). Before a court can determine whether an agreement has legal consequences, it must first establish and be satisfied that the involved parties had the intention of entering the agreement in the first place. One clear purpose of the rules governing the intention to create legal relations is to avoid overwhelming the courts with disputes that actually do not have any legal liabilities attached to them. Therefore, the rules distinguish between agreements that may be supported and enforced in law courts and those that are purely gratuitous promises that do not warrant any legal intervention. For example, one presumption would be that when agreements are of an entirely social or domestic nature when being formed, it follows that there really was no intention that they should be enforceable through legal procedures (Bernstein 2008, p. 48). These may be the agreements between lovers, parents and children, or friends. However, the presumption from the commercial or business context is that the parties intended that their agreements be legally binding unless they expressly indicate that they do not wish so. Therefore, the rules also indicate the intention to seriously uphold the significance of the relations being created. In the absence of the intention to create such legal relations, a legal, binding and enforceable contract cannot be created. From this observation, an implication of the rules, therefore, is that the parties have no capacity to sue for any breach if they had no intention to create the relation because the contract is deemed to be illegal. Without the intention, the contract is merely a promise without the binding effect (Christensen, Butler & Dixon 2009, p. 14). 2.2 Compliance means the general action of conforming to rules such as law, policies and specifications (McKendrick 2005, p. 69). In the UK, for example, there exist compliance regulations, some governed by the EU and others by designated bodies such as the Information Commissioner’s Office, the Financial Conduct Authority and the Environment Agency. Effective compliance plans are considered to be living documents and are integral parts of all organisations. Ensuring active compliance is in place is one way of streamlining the business operations of organisations and avoiding the possibility of statutory infringements. By adhering to compliance provisions, an organisation exhibits a proactive approach to ensuring that they satisfy their regulatory and statutory obligations. It is also evidence that its endeavour to follow the rules is based on good faith. On the other hand, noncompliance has legal consequences. For example, in the Anderson Ltd v Daniel case of 1924, the defendant (Anderson Ltd) was found to have failed to comply with the provisions of the 1906 Fertiliser Act (McKendrick 2005, p. 83). The Act required every vendor who sold soil subjected to artificial processes to be used as a fertiliser to issue an invoice detailing the percentages of the constituent chemicals. The invoice Anderson Ltd issued to Daniel did not comply with that provision and failed to list the percentages. Apart from the court ruling that Anderson Ltd was not only legally responsible to pay a penalty, it also held that the sale was illegal, and there was no provision to sue for the contract price. A critical evaluation reveals that noncompliance by one party may and can have undesirable consequences to all parties; Daniel was not able to sue for the price he had paid for the soil after later realising that the invoice lacked the vital information. Therefore, he lost the contract price because of ignorance in failing to scrutinise the invoice before paying while Anderson Ltd were penalised for negligence. Finally, it is also revealed that not all compliance plans are foolproof, and statutory lapses may often crop up. Rather, compliance plans merely have a preventative nature. 3.1 Consideration is a necessary element of a contract, and it bears value in the form of services, items or money (Atiyah 2000, p. 163). Some of the rules governing consideration state that it must have an economic value; although it need not be necessarily adequate, it has to be sufficient; and payment of a sum lesser than the agreed consideration cannot be considered to be in full satisfaction of the sum. Even if it may seem negligible, consideration ought to have some material or economic value. It cannot merely be based on emotional or sentimental value such as a promise. For example, in the White v Bluett case of 1853, a son sued the executors of his deceased father’s estate with allegations that he had promised him a share if he stopped complaining about unfair treatment (Atiyah 2000, p. 165). The alleged promise was ruled to be too vague with no material or monetary value indicated anywhere in the will. Therefore, his promise to his father that he would stop complaining about his perceived unfair distribution of wealth could not amount to consideration, which is consistent with the rule that consideration must have economic value. Secondly, for consideration to be deemed sufficient, it must be of sufficient value to the other party. In particular, this gives courts the liberty not to be considered with market prices because they may interfere with the freedom of a contract. For example, the Chappell & Co v Nestle Ltd case AC 87 of 1960 is a demonstration that a contract may have minimal value but at the same time be sufficient enough to sustain the contract. The copyright to the brand Rockin’ shoes was owned by Chappell, and Nestle promised to give records of it to whoever sent them three chocolate wrappers, which had to be from 6d chocolate bars and also 1s 6d. The 1956 Copyright Act required a royalty to be paid to the copyright owners amounting to 6¼% of the retail price, while Nestle insisted that the retail price was 1s 6d (Atiyah 2000, p. 201). The judgment held that the wrappers made a portion of the consideration implying that Nestle breached the Copyright Act by not paying royalties that reflected the wrappers’ extra cost. Effectively, this was the House of Lords’ confirmation that consideration does not have to be adequate but needs to be sufficient. References Atiyah, P 2000, Consideration: a restatement, Oxford University Press, London. Austen-Baker, R 2000, ‘Gilmore and the strange case of the failure of contract to die after all’, Journal of Contract Law, vol. 4, no. 1, pp. 92-104. Bernstein, DE 2008, ‘Freedom of contract’, George Mason Law & Economics Research Paper No. 08-51. Burling, JM 2011, Research handbook on international insurance law and regulation, Edward Elgar Publishing, New York. Burrows, A 2009, Offer and acceptance: a casebook on contract, Hart Publishing, Oregon. Christensen, S, Butler, D, & Dixon, B 2009, Contract law, Oxford University Press, North Melbourne. Martin, E, & Law, J 2006, Oxford dictionary of law (6th ed), London, Oxford University Press. McKendrick, E 2005, Contract law - text, cases and materials, Oxford University Press, New York. Read More