contracts

A contract is a legally binding agreement between at least two parties.

Contracts

In order to form a contract, the essential elements are:

1. offer;
2. acceptance;
3. consideration;
4. capacity;
5. intention to create legal relations;
6. no vitiating factors.

Formation of Contracts

In Hayes v Martin, Justice Toulmin discussed offer and acceptance in the context of formation:

1. The test of whether an offer has been accepted is an objective test, namely whether the words or conduct are such as to induce a reasonable person to believe that the person intends to be bound.
2. As a general rule an offeree who does nothing in relation to an offer is not bound by its terms.
3. If the offeree has solicited the offer, the agreement that he should not be put to the trouble of rejecting the offer when it is made loses much of its sting.
4. If there is a course of dealing between the parties, the offeror may be led to suppose that silence amounts to acceptance.
5. Acceptance can be given by conduct. Where this amounts to a positive act it may well be clear that acceptance has been given, although no words of acceptance have actually been spoken.

Offer

An offer is a promise to do or not to do something in sufficiently clear terms, that may be accepted by another. An offer should be distinguished from an invitation to treat and a mere expression of intention to do or not to do some act. Offers do not necessarily need to be made to one person – that may be made to the world at large or to specific groups of people.

The significance of an offer is that when it is accepted (subject to the other essential criterion, below) the contract is formed.

In addition to being accepted, an offer may be rejected, a counter-offer may be made, the offer may lapse or the offeror may withdraw the offer, such that it is no longer available to be accepted.

Option Agreements prevent an offer being withdrawn for a period of time.

Acceptance

When an offeree (the "acceptor"), accepts an offer, the contract is formed. Acceptance may be in writing, orally or implied by conduct and silence cannot amount to acceptance of an offer other than in unilateral contracts or the postal acceptance rule applies.

Consideration

Consideration is a promise, an act, or a promise not to act and represents the value in the contract. For example, in a services contract for services, one person will promise to perform services (the consideration of one party), and the other will promise to pay money in exchange for the service (the other party's consideration). Consideration in a contract may be executory, executed or past. Executory consideration is a promise that will be performed in the future, executed consideration is a promise that has been performed thus giving rise to the obligation on the offeror to perform their promise, and past consideration is where a promise is performed before the formation of the contract and as such cannot be used to bind the other party to the contract: importantly, past consideration is not sufficient to form a binding contract.

Consideration must move from the promisee, as the English common law system does not enforce gratuities as the civil law system does. Also, consideration need not be adequate, but must be sufficient. That is to say that there is no requirement in law that the value of the consideration between the parties must be equal or near equal provided there has been no vitiating factors (see contractual consideration).

Capacity to Contract

In order to enter a contract, a party must have the legal capacity to do so, and as such cannot be a bankrupt or a minor (subject to the Minors' Contracts Act 1987). Under this Act for instance minors are able to enter into contracts for necessities.

Intention to create Legal Relations

The parties must intend that the offer and acceptance be binding upon them. There is a presumption operating in commercial contracts that the parties intend to create legal relations.

Construction of Contracts: General Principles

The interpretation of the terms of a contract is a question of law and exclusively within the jurisdiction of the judge to decide. Courts construe contracts and do not make them. Each term does not need to be completely unambiguous: a judge will construe the contract by giving each term its ordinary and everyday meaning unless there is some basis to depart from this general rule. As a matter of construction, the parties are to be confined to the terms contained within the four corners of the document in which they have chosen to record their agreement. Construction places emphasis on the manifested intentions of the terms contained in a contract and not the parties actual intentions. Accordingly, even though one or more terms may be ambiguous the contract does not fail for uncertainty.

Privity of Contract

The doctrine of privity of contract consists of two general rules: firstly, a third party cannot be subjected to a burden of contract to which he is not a party. The second is that a person who was not a party to a contract could not sue upon the contract in order to obtain the promised performance. This rule has been altered by the introduction of the Contracts (Rights of Third Parties) Act 1999.

Terms of Contracts

During the course of contractual negotiations, various claims, statements and inducements are made to entice the other party in enter into the contract. Not all statements made are enforceable as terms of the contract. Words which are used might include:

1. sales talk (aka 'puffery') or laudatory words in respect to the goods or services such as "best pies in London" or "Finest after-sales service this side of the Thames" are vague, not specific and lack any specific contractual meaning and not considered terms;
2. terms of the contract; or
3. statements of fact, which are able to be verified. Legal consequences may flow if such statements are inaccurate they are seen to be intended to form part of the contract (as conditions of contract or warranties) or they to induce the other party to enter into the agreement.

Whether or not a pre-contractual statement is a misrepresentation or a term of the contract which is formed is a question of law determined by reference to a series of factors, which include:

1. challenges to verify: where the representor challenges the representee (the receiver of the statement) to check the accuracy of the statement. This is because the challenge ordinarily lends weight to its credibility. The request to verify the truth of the statement may involve third parties, such as an independent valuer, surveyor, architect, depending on the facts of the case;
2. effect of the statement: a statement designed to prevent the receiver from discovering a flaw in the subject matter of the agreement is likely to be a term;
3. importance of the statement: where a statement is made which is of significant importance to the claimant, such as a special requirement or performance capability, and is intended to induce the claimant to enter into the contract, it is likely to be a term of the agreement;
4. written agreements: where the parties have reached on oral agreement and the terms are later reduced to written form, statements incorporated into the written version are likely to be terms of the contract and those not included, representations;
5. skill and expertise: where one party has a technical expertise or special knowledge in respect to the subject matter of the contract and the other party does not, the statements of the expert or person with special knowledge are more like to be terms of the contract.
   In contrast, where the expertise levels are about equal or the receiver of the statement has a greater knowledge, the statement is more likely to be a representation.

Assignment of Contractual Rights

The burden of a contract cannot in principle be transferred so as to discharge the original contracting party without the consent of the other party. There are two exceptions. If the contractual rights have been assigned, those rights will be subject to the original contract.

• In Britain & Overseas Trading Ltd v Brooks Wharf Ltd, an exemption clause in the original contract was binding on the assignee of the contract. Such cases are examples of the "conditional benefit" principle. This principle applies where the right which has been assigned is on the condition that certain restrictions are observed. These are an intrinsic part of the right, so that the burden is annexed to the benefit of the contract. Therefore, the person with the benefit must perform the burden, or otherwise forego the benefit. Whether a conditional benefit arises is dependent upon the proper construction of the contract.
• The second exception is the pure benefit and burden principle, which arose in the case Tito v Waddell (No.2), where the rights given in the contracts were not qualified nor conditional on certain obligations, but still rendered the defendants liable.