Requirements for a valid contract

8 August 2016

In order for a contract to be legally binding, both parties must make an offer and an acceptance of that offer. An offer, by law it is generally presumed that in a commercial transaction, the contracting parties must have the intention to create a legally binding contract. This means that if they have signed a contract for business-related activities, then they will be able to sue the other party if that party does not fulfill the contractual provisions. An offer is a proposal in specific terms made by a person or an organisation, this person is called the offeror and the person who the offer is intended is called the offeree.

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An acceptance is the offeree’s clear and unconditional agreement to the offeror’s terms. Should the offeree try to change any of the terms put by the offoror there is no contract as they have tried to change some of the terms of the offer. This presumption can only be rejected if the parties expressly state that they do not intend to make a legally binding contract. On some documents they may have “subject to contract” printed on them. These words have the legal meaning that the document is not a contract, and that all of the contents will be bound by a subsequent contract at a later date.

A party that is acting “subject to contract” can withdraw from the negotiation at any time before the contract is concluded. In case of dispute, the burden of proof that the intention was to create a binding contract rests on the person who wishes to rely on the contract. An example of this type of case is Carlill v Carbolic Smoke Ball Co. 1893. The Carbolic Smoke Ball Company placed an advert in their paper stating that if a customer used their product, as directed 3 times a day for two weeks they would not contract the flu. So sure in their product they said that they would give ?100 should their product fail and set aside ? 1000 to show their sincerity in following through with their offer. A woman called Mrs Carlill bought and used the product as directed yet still contracted flu so she sought to claim her ? 100 that had been promised by the company. The defendant, Carbolic Smoke Ball Company was taken to court and claimed that there was not a clear offer but was more of an invitation to treat. They also claimed that: The advert was a sales puff and lacked intent to be an offer. It is not possible to make an offer to the world. There was no notification of acceptance.

The wording was too vague to constitute an offer since there was no stated time limit as to catching the flu. There was no consideration provided since the ‘offer’ did not specify that the user of the balls must have purchased them. At the Court of Appeal the judge ruled that that Mrs Carlill was entitled to the reward as the advert constituted an offer, which she had accepted by performing the conditions stated in the offer. P2: Explain the law in relation to the formation of a contract in a given situation. Throughout the following case study the law in relation to the formation of a contract will change at different intervals.

Taking into consideration the legal significance at each stage of this case and then drawing a legal conclusion of what the appropriate action should be. ‘At 9:00, X telephoned Y, offering to buy Y’s 1968 vintage Jaguar car for ? 25,000. Y said that he would sell, but that he wanted ? 30,000 for it. X replied that he would think about it and call Y back. ’ At this stage X has made a clear offer to Y but he has not accepted this offer. Y has made it clear he is willing to sell but for no less that ? 30,000. Both parties have given consideration and Y has made an offer of ? 30,000 to X.

This is not an acceptance but an invitation to treat and, therefore, simultaneously a rejection of the original offer. He has not made a further offer for the asking amount but asks for a moment for some time to think. At this time there is no legal contract between the pair. ‘At 12:00, X telephoned Y again. However, Y had just gone out for lunch, so X left a message on Y’s answer machine, saying “I’ll give you ? 30,000 for your 1968 vintage Jaguar as agreed. ”’ After taking time to think about the invitation to treat put towards X he then tries to contact Y but he does not receive the message at this time.

If Y had heard this message and accepted then a legal contract would have been formed between the pair and clear intention to create legal relations is evident and both parties would have to fulfill their side of the agreement. However Y does not receive the message and is unaware of offer to pay the full asking price by X. The time that X has taken in between the rejection of his previous offer to putting forward and offer for the full price and finally accepting Y would still be allowed to make an offer on the same product as the acceptance had not been made. ‘Meanwhile, Y spent his lunch break with a business colleague, Z.

Over lunch they drunk two bottles of wine between them, and as they were finishing Y told Z that he would like to sell his 1968 Jaguar for ? 30,000. Z said: “I’ll give you ? 30,000 for it! ” and Y replied: “It’s yours! ” While this meeting is happening X has put another offer into Y for the full price but Y was unaware of this when he offered it to Z. Consideration was given by both parties of Y and Z and a legal contract was formed. However both parties had consumed 2 bottles of wine between them meaning that they both may not have the capacity to be able to form this agreement.

There is no legal boundary for this and who is to say that they both would not have the capacity to agree to the terms. The result of weather this is a legal contact or not depends on the state of mind of both parties when entering into the agreement. When he gets back to his office, Y heard X’s message on his telephone and ignores it. ’ Y would be within his right to follow out the contract he had made to Z if they had the capacity to know what they were entering into. The delay that X took before accepting the offer resulted in Y making the same offer to Z and Z accepted the offer to Y’s knowledge first.

To answer X’s request for legal advice on where he stands. Unfortunately there is no proof to show that Y and Z did not have full capacity when consideration was given by the two parties. The rejection of his initial offer of ? 25,000 with an invitation to treat from Y of ? 30,000 does not form a legally binding contract, and the delay in which he took to make another offer resulted in Y making another offer to his colleague, Z. The offer made to Y was not made directly to him and there for he was unaware before he made an additional offer.

Z’s acceptance of the offer made to him by Y was accepted to both parties knowledge and therefore a legal contract was formed between the pair before your acceptance reached Y. Unfortunately the intent to make legal relations between by Y and Z were true and a legal contract between the pair was formed. M1: Analyse the impact of the requirements for a valid contract in a given situation During each stage of a contract being legally formed the law may sometimes not be suitable to deal with a particular circumstance.

For example in the case study for task 2 it is perfectly adaptable and clear with the decline of the first offer of ? 25,000 form X with invitation to treat from Y of ? 30,000. The stating of a price in which a person would be willing to sell is not a counter offer. The law surrounding this is strong with clear understanding from both parties that there is no legal contract between them as both parties have not agreed to a set of terms. This is a fair approach that is set as it ensure a person is able to get what they want for their product and are not bound by a price that is set by somebody else for their goods.

The acceptance of the offer made by Y towards X was accepted but Y would not become aware of this until he had already entered into a legally binding contract with Z. The elements that are used to determine whether a contract is legally binding does not specify whether the offeree has to make the offeror aware of the acceptance but risks losing the product to someone else; which we see in this case study. The law that surrounds this is not very well defined as it is not clear where both parties stand and both are able to argue a case on whether they have entered a legal contract or not.

This would not be a fair way in which the law handles this as X would feel cheated. Y makes an offer to Z but after they had consumed two bottles of wine and the law clearly states that both parties have to have full capacity. However this is a blurry area as it has no clear boundaries which state what having full capacity is and the same amount may affect people in different ways. Two bottles of wine may incapacitate some people but the same amount may not affect another. The law at this point is very weak as there are no set restrictions on what ‘full capacity’ entails.

Additionally should Z then change his mind he could put a case forward that he did not have complete capacity at the time of making the decision. When Y finally receives the message of the acceptance and ignores it, he is perfectly within his right to do so. The law does not require a person to inform somebody of the decline of an offer but X may be put off doing any business with Y in the future. The requirement for a valid contract has its strong points and weak points as a few areas are not clearly defined.

Throughout the case study all areas of the requirements for a valid contract has to assessed and it is clear that a few situations lack clear instructions of where each party sit when making a legally binding contract due to poor definition of some areas. The requirement that would need further clear boundaries is capacity. The stating of a price that Y would be willing to sell for when rejecting the offer of ? 25,000 is not a counter offer but an invitation to treat and no legal contract was ever formed between X and Y.

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