© Oxford University Press, 2007. All rights reserved. 4 The Contract (Part One): The Elements

© Oxford University Press, 2007. All rights reserved.

Definition of a Legal Contract

A legal contract is an agreement between two or more parties in which legal rights and obligations are created, and are enforced by a court.


Elements of a Valid Legal Contract• For a contract to be legally enforceable the contract must

contain the following elements:

(1) AN OFFER(2) ACCEPTANCE OF THE OFFER(3) CONSIDERATION(4) INTENTION TO CREATE LEGAL RELATIONS(5) CERTAINTY OF TERMS(6) CAPACITY TO CONTRACT

• All of these elements must be present before there is a valid and legally enforceable contract.


The Elements of a Valid Contract cont…

THE CONTRACT

OFFER CONSIDERATION

ACCEPTANCE INTENTIONCERTAINTY

CAPACITY


Elements of a Contract: 1) Offer

What is an offer?

– Does not have to be in writing

– Promissory: Promise to do something or to refrain from doing a certain act

– Intention: To be legally binding

– Communication: To Promisee

– Certainty: Terms must be clear & certain

– Finality: Must be a degree of finality with the terms


Elements of a Contract: 1) Offer cont…

Objective Test:• Reasonable person test• Standard applied by courts• Contract Law v Criminal Law• Contract law applies objective test to determine

liability• Criminal law applies subjective test to determine guilt



Offers v. Invitations to Treat• Shop Displays• Advertisements• Catalogues• Sales Puffery• Vending Machines• Delicatessens



An offer must be made to another person• Offeror: party that makes the offer• Offeree: party that receives the offer

Offer made to the whole world

Carlill v Carbolic Smoke Ball Company



Offer must be communicated• Offeror to Offeree • Mode of Communication• Verbal/ Writing/Post• Contemplation of the Parties



Termination of an offerAn offer can be terminated through the following ways:

(1) Revocation (2) Lapse (3) Rejection By Offeree (4) Implied rejection : counter offer

Eg - A offers to sell his car to B for $1000. B says to A, “I will give you $750". B statement amounts to a counter offer which terminates the original offer by A


Do you have a valid offer?

Offer

Do you have validoffer?

Yes

No

PreliminaryInquiries

Supply ofInformation

Invitation To Treat


Elements of a Contract: 2) Acceptance• An acceptance is a final and unqualified assent to all

the terms of the offer.

Rules of acceptance :

(1) Offer still in force

(2) Offer to made by the offeree

(3) Unqualified an absolute

(4) Acceptance can be in writing, oral or by conduct

(5) Silence does not constitute an acceptance

(5) Communication


Elements of a Contract: 2) Acceptance cont…

• Communication of acceptance

• Completed acceptance

• Reasonable time


Elements of a Contract: 2) Acceptance cont…

• Postal acceptance rule

Limitations to the rule • letters and telegrams

• instantaneous methods of communication

• addressed and stamped

• actual communication contemplated


Do you have a Valid Acceptance?

Acceptance

Must Match theTerms of the Offer

Communication

Exceptions

Postal AcceptanceUnilateralContracts


Elements of a Contract: 3) Consideration

• Applies to all contracts other than contracts made under seal/ deed. Contracts made under deed form do not require consideration.

1) Definition Consideration is an essential element in every simple contract. The doctrine of consideration requires that:

(1) there must be an exchange between the parties, involving either a promise for promise, or promise for performance; and

(2) the promise or performance given in exchange must have value.


Elements of a Contract: 3) Consideration cont…• Rules of Consideration• Consideration does not have to be adequate

• Consideration must be sufficient

• Consideration must not be illegal

• Consideration must move from the promisee

• Past consideration is not good consideration


Rules of Consideration

Consideration

Involves a mutualexchange

Must not be pastCannot be illegalMust not be

ilusory


Elements of a Contract: 3) Consideration cont…

Renegotiating Debts

• Performing existing contractual obligations does not amount to good consideration to enforce a promise : Foakes v Beer

Example (1) : A owes B $100. A decides to pay B $90 in full satisfaction of the debt. B then sues A for the balance ($10). B will succeed because there is no consideration for his promise to accept $90 for full payment : Foakes v Beer

Example (2) : A owes B $100. A decides to pay B $90 earlier for full payment. B will not succeed for the further $10 because A has done something extra, he has paid earlier : Pinnels case.


Elements of a Contract: 3) Consideration cont…• Promissory Estoppel

The strict application of the doctrine of consideration is modified with the doctrine of promissory estoppel. The doctrine of estoppel operates to enforce certain promises which have not been supported by valuable consideration.

Elements of the doctrine of estoppel:– There must be a promise by the promisor to the promisee– The promisee must have relied on the promise– The promisee will suffer detriment if the promisor is allowed to go back

on his promise– It would be unconscionable (unfair) to allow the promisor to break his

promise


Elements of Promissory Estoppel

PromissoryEstoppel

Promise/Representation/

AssumptionReliance Material Detriment Unconscionability


Promissory Estoppel cont…Walton Stores v Maher

• Walton’s case was seen as important in the development of the doctrine, because it extended the operation of the doctrine to create a new right of action.

• Promissory estoppel only operates when all the above elements have been satisfied. Promissory estoppel has its origins in the High Trees Case. The doctrine has been extended in the High Courts decision in Walton Stores.

• The principle of promissory estoppel only applies when it would be inequitable/unconscionable (unfair) to allow the promisor to go back on his promise.


Promissory Estoppel cont…Example: • A enters into a lease agreement with B. The lease

provides that A pays B $500 weekly rent. A then falls into financial difficulty and asks B if he could reduce the rent for 12 months to $300. B agrees. A relies on B’s promise to accept $300 rent, and pays him that amount. 12 months later B sues A for the difference in rent ($200 week).

• Advise A.


Elements of a Contract: 4) Intention to Create Legal Relations• Commercial agreements

For a contract to be legally enforceable there must be an intention by the parties to be legally bound. In Commercial and Business Agreements there is a presumption that the parties intend to create legal relations: Edwards v Skyways.

Exclusions:1) ExpressThis presumption can be rebutted but the onus is on the party seeking to exclude legal relations. An express exclusion of intention by the parties will be given effect by the courts.

2) Social & Domestic Agreements.There is a presumption that social and domestic agreements are not intended to create legal relations. However this can be rebutted by evidence to the contrary.


Elements of a Contract: 4) Intention to Create Legal Relations cont…

• Husband & Wife Agreements

The courts consider domestic arrangements between husband and wife to be social agreements and not legally enforceable: Balfour v Balfour.

Exceptions:

If the agreement between husband and wife involves essentially a commercial matter then the agreement will be enforceable : Milliner v Milliner.


Do you have an intention to create legal relations?

Do the parties havean intention to create

legal relations?Yes

Check to see whetherthe intention has been

expressly excluded

If intention has notbeen excluded check

for other elements

No

Check if thecommercial

presumption applies

Check if the social/domestic

presumption applies

If the commercialpresumption applies

check for otherelements


Elements of a Contract: 5) Certainty of Terms• As a general rule the courts will not enforce vague or

incomplete agreements. • However the courts will strive to fund a valid contract. If

terms are uncertain, the courts may clear the uncertainty by the ff means:- Trade customs & Usage

- Previous dealings between the parties to determine the

essential terms of the agreement.


Elements of a Contract: 6) Capacity to Contract

• The capacity of certain persons to enter into legal contracts may be affected.

• Especially minors, drunkards and bankrupts.


6) Capacity to Contract – Minors

Minors• Minors are any persons below the age of 18. • Contracts with minors fall within three categories:

- Valid- Voidable; and- Void

• Valid Contracts - 2 types: Contracts for Necessaries and Contracts for Beneficial Service.


6) Capacity to Contract – Minors cont…Contract for Necessaries• Necessaries are defined as goods suitable to the condition in life of such a

minor and to his actual requirements at the time of such sale and delivery.

Two important questions arise:(1) Can the goods/services be classed as necessaries for a person in the circumstances of the minor in question?(2) Were the goods/services in fact necessary to the minor at the time?

• If the answer is yes to both these questions then there will be a valid contract and the minor will have to pay.

• Examples of goods/services which are necessaries include: food, housing, education, medical and legal expenses.


6) Capacity to Contract – Minors cont…

Contracts for beneficial services

• The key question here is to ask:

Does the contract of service provide a benefit to the minor?: Hamilton v Lethbridge.


6) Capacity to Contract – Minors cont…Voidable Contracts

• These are contracts which can be avoided by the minor before he/she turns 18 or within a reasonable time after he/she turns 18.

• They apply to contracts which are of a permanent nature/continuing obligation. Eg: shares, leases and partnerships.

• With voidable contracts the minor can free himself from future obligations, but will have to pay for benefits already received.


6) Capacity to Contract – Minors cont…

Void Contracts

• Contracts other than for necessaries or beneficial contract of service are void against the minor.

• Contracts involving loan repayments are also void against the minor.

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© Oxford University Press, 2007. All rights reserved. 4 The Contract (Part One): The Elements