Session 09: Main Requirements of a Valid Contract PDF

Unit VΙ – OSU4404 Session 09: Main Requirements of a Valid Contract Session 09 Main Requirements of a Valid Contract. Contents Introduction 9.1 The nature of a contract 9.2 Formation of a contract 9.3 Offer 9.4 Invitation to treat. 9.5 Acceptan...

Unit VΙ – OSU4404 Session 09: Main Requirements of a Valid Contract Session 09 Main Requirements of a Valid Contract. Contents Introduction 9.1 The nature of a contract 9.2 Formation of a contract 9.3 Offer 9.4 Invitation to treat. 9.5 Acceptance Introduction A number of elements have to be present for an agreement to be legally binding. If a contract does not contain all of the elements present, the entire or a portion of the contract will be null and void. This session provides a basic understanding of contract formation and the fundamental principles of contract law. As business students, it is critical to understand and know about these areas. Therefore, this course is essentially forced on non-legal students; it covers the fundamentals of contract law in an easy-to-understand manner. 9.1 The nature of a contract In the commercial world transactions between two or more parties are common, in these transactions’ agreements are made. The law of contract is the study of legally binding agreements made between two or more parties. By these agreements rights are acquired by one or more to act on the part of the other or others. Agreements must be intended to have legal consequences. For example, when a man marries a woman, they both enter into a contract. When a person rents out or purchases a property, he enters into a contract. So, an exchange of promises between two parties is the usual basis for a contract. 9.2 Formation of a contract A contract is an agreement, but every agreement is not a contract. The distinguishing characteristic of a contractual agreement when compared with other agreements is the feature of a binding legal obligation. 11 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 09: Main Requirements of a Valid Contract A contract is an agreement that can be enforced by law. It consists of an offer and an acceptance. Therefore, in order to confirm whether a lawful agreement is reached between parties, there should exist an offer and acceptance. Sometimes the transaction is so complicated that it has to be left to the courts of law to decide as to whether a lawful contract exists between the parties. Lee defines a contract as "an agreement actionable and enforceable in law”. It may be defined as an agreement between two or more parties that is intended to have legal consequences. This definition is satisfied when four elements are present in a contract. The following are the four elements that should be present in a legally enforceable contract. There must be an offer and an acceptance. The parties to the contract must intend their agreement to create legal consequences. If the agreement has to be made in a particular form, parties must observe that form. (eg. Section 2 of the Prevention of Fraud Ordinance) There must be Justa Causa or valuable consideration. A contract that does not comply with the above requirements may be void, voidable, or unenforceable. The first requirement in the formation of a valid contract is that the parties must agree about what they are contracting. There must be a meeting of the minds of the parties to the contract. It is said consensus ad-idem or the meeting of the minds. When A and B enter into an agreement and if such agreement brings about a valid contract recognized in law there arise rights and obligations on the part of the parties to the contract. There should be consensus ad-idem or meeting of the minds signifying that the parties have agreed together about the same thing. 12 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 09: Main Requirements of a Valid Contract Offer & Legal Acceptance Purpose Consideration Valid Contract Capable Mutual Parties Assent Figure: Formation of a Valid Contract 9.3 Offer An offer is an expression of willingness to contract on certain terms made with the intention that the offer become binding as soon as it is accepted by the person to whom it is addressed. The person who makes the offer is called the offeror and, the person to whom it made is called the offeree. A valid offer must fulfil several requirements. An offer must be definite. This means that an offer must not be uncertain or vague and must be seriously intended. An offer may be oral or in writing. An offer must be communicated to offeree. An offer must be distinguished from an invitation to treat. 13 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 09: Main Requirements of a Valid Contract 9.3.1 Cross offer and counteroffer When A makes an offer to B and by coincidence B make are an offer to A in identical terms and the two offers cross in this post and if both parties make identical offers without prior consent or agreement is there a contract between A and B? In Tina Vs Hoffman & Co. (1873) 29 LT 271) the Defendant wrote to the Plaintiff on 28th November 1871 offering to sell him 800 Tons of Iron at 69sh. per Ton. On the same day the plaintiff wrote to the Defendants offering to buy the identical amount of the same material at the same price. The letter crossed in the post. It was held that there was no contract between the parties. When an offer is made to a person the latter without accepting it may make another offer, which is known as a counteroffer. In the old English case of Hyde Vs Wrench, (1840) 3 Beav 334) A offered to sell his Farm for $1000 to B, but B offered $950 which A refused to accept. Later B agreed to give A $1000, but A refused to sell. It was held that since B had rejected the original offer of A valid contract did not come into being by B’s latter acceptance of the rejected offer (counteroffer). 9.4 Invitation to treat. To consider whether there exists an offer, the offer must be distinguished from a mere invitation to treat. An invitation to treat is a preliminary step in the negotiation which may result in an offer. The offeror must be able to undertake an obligation upon certain conditions leaving the offeree the option of acceptance or refusal. An invitation to treat is not an offer arid and therefore cannot be accepted. Examples of invitations to make offers include display of price-marked goods in shop window an advertisement for sale or of rewards, an auctioneer’s request for bids, calling for tenders, and an invitation by a company to the public to subscribe for shares in that company. Let us now consider some examples to understand offer and acceptance. Does an advertisement made by a trader constitute an offer? It is not an offer, but it is an offer to receive offers that are an invitation to treat. In Lallyet VS Negris & Co.(1911) 14 NLR 247 ) the defendant advertised ham for sale. The plaintiff alleged that the ham was unfit for human consumption and sued the defendant in the court of N'Eliya, to recover Rs. 40/53 as damages for breach of contract. It was held that this is an invitation to do business like the book sellers Catalogue and not an offer intended to create legal obligations. Prices are tagged and displayed in a super marker. A customer walks into the supermarket to purchase some goods. The question is at what point of time is the offer and at what point of time is the acceptance. Is the display of articles with price tags an offer and when a customer selects an item does it signify acceptance? In English Pharmaceutical Society of Great Britain Vs Boots Chash 14 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 09: Main Requirements of a Valid Contract Chemists Ltd.( 1 QB 401; 2 WLR 427; 1 All ER 482; (1953) 117 JP 132; (1953) 97 SJ 149; CLY 2267), it was held that the display was only an invitation to treat. The Defendant adopted self-service system in one of their shops. A customer on selecting. an article to which the price was tagged and which he desired to buy has to take it to the cash counter. Near the counter was a registered Pharmacist who was authorized to stop a customer from removing any drug from the shop if he thought fit. The act made it unlawful to sell a listed article "Unless the sale is effected under the supervision of a registered Pharmacist". Therefore, the question that had to be decided was at what point of time did the sale take place? If the display of the articles with prices attached is an offer, when the customer put the article into his bag then the contract is made, and the goods are being sold at that point of time. On the other hand, if the display was only an invitation to treat when the customer put it into his bag the seller was free to accept or reject. If they accepted, they did so only when the transaction was approved by the Pharmacist near the cash counter. The Court of Appeal held that the display was only an invitation to treat; the transaction is in no way different from the normal transaction in a shop in which there is no self-service scheme. It would be wrong to say that shop keeper is making an offer to sell every article in the shop to any person who might come in and that person can insist on buying an article by saying "I accept the offer" offering to buy the identical amount of the same material at the same price. 9.4.1 Auction Sale As regards sales, it was held in Payne vs Cave 1789 that the auctioneer's request for bids is not a definite offer. The bid of a prospective buyer is an offer which the auctioneer is free to accept or reject. This is also the position set out in the Sale of Goods ordinance in Sri Lanka. 9.4.2 Tender A tender notice is an invitation to treat and does not amount to an offer or promise to sell to a person who makes the highest tender or to buy from the person who makes the lowest tender A.G. vs Vithilingam.(1994) 1 Sri LR 232) For an offer to be valid and effectual, it must be communicated to the offeree so as to give the latter an opportunity to accept or reject it. when the offer reaches the offeree and if it is to constitute a binding contract it must be accepted by the offeree and such acceptance must be communicated to the offeror. 9.4.3 Advertisement for sale In Harris V Nikerson (1873, LR 8 Q.B 286) the Plaintiff read an advertisement for sale of furniture and went to the place of sale spending money. He found that the sale was cancelled So he claimed damage on the basis that the offer was made by the advertisement and that he accepted the offer and proceeded to the place of sale, the plaintiff failed in his claim as there 15 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 09: Main Requirements of a Valid Contract was no valid contract between the parties as the advertisement was only an invitation to treat and not an offer. 9.4.4 Offer made to public. There is a distinction to the offer when it is made to the whole world. Suppose a person has lost his dog carries an advertisement that a finder of this dog will be rewarded. A person who accepts this offer may claim for the reward. In Carlill Vs Carbolic Smoke Ball Co. (1892) 1 QB 256 the proprietor of the Carbolic Smoke Ball Company published an advertisement offering £100 to anyone who succumbed to influenza having used a smoke ball according to the instructions given. The plaintiff bought and used the ball and suffered from influenza. He sued for £100. In this instance there was a valid contract. Activity 9.1 1. How would you distinguish an offer from an invitation to treat? 9.5 Acceptance Once an offer has been made there must be acceptance to complete the agreement. The court must be satisfied that. There has been acceptance of the offer. That the acceptance has been communicated to the offeror. The offeree must unreservedly agree to the terms proposed by the offeror, and it must be clear and unambiguous. Acceptance may be known from the words of the documents that have passed between the parties. It may be inferred from their conduct. In Muthukuda Vs, Sumanawathi acceptance of a contract of marriage was by the conduct of the bride. If the offeree introduces a new term which the offeror was unaware, and makes a counteroffer, such an offer destroyed the original offer. If the new term of the offeree accepted by the offeror, then the new terms and not the original offer becomes the terms of the contract. 16 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 09: Main Requirements of a Valid Contract In Hyde V Wrench A offered B a farm for 1000 Pounds on 06th June, B made a counteroffer of 950 Pounds. On 27th June, A rejected the counteroffer. On 29th June B wrote to A that he is now prepared to pay 1000 Pounds. It was held that his counteroffer has made the original offer invalided and that no contract came into being. When there is a change in the terms when an offer is accepted there is no valid acceptance. A conditional assent to an offer does not constitute acceptance. Just as the offer should be communicated, offeree must communicate his acceptance to the offeror. Mere intention to do so will not suffice. There must be an external manifestation of the intention to acceptance. Activity 9.2 1. What would you understand by the term “Acceptance” in relation to a contract? 9.5.1 Acceptance by Performance Acceptance may be by performance. In a case of a unilateral contract, the offeror is deemed to have included in his offer a term providing that performance by the offeree shall be sufficient acceptance and communication is not necessary. The offeror is bound when the offeree performs whatever act is required according to the terms of the offer. In Carlill V Carbolic Smoke Ball Co as explained earlier, the plaintiff succeeded in his claim for the reward. In reviewed cases, acceptance by performance can be only once. Even though the offer is made to the public, communication of acceptance is not necessary. 9.5.2 Acceptance by post There are three theories, in connection with communication of acceptance by post. The information, Recognition or Ascertaining Theory: where the contract is completed only from the time the offeree’s acceptance is brought to the actual knowledge of the offeror. Declaration Theory: where the offeree declares his acceptance of the offer even though that declaration does not come to the knowledge of the offeror, there is acceptance of the offeror. Expedition Theory: where the contract is complete from the time when the offeree has put the acceptance out of his power of control. In other words, the contract is complete as soon as the letter is posted. 17 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 09: Main Requirements of a Valid Contract In Adams V Lindsell (1818) 1 B & Ald 681) 1818 on 02nd September, A wrote to B offering to sell wool at a price and requesting an answer by post. The letter was misdirected and reached B on 07th September. The reply on acceptance was sent at once and reached A on 09th September, but the wool had been sold on 08the September. It was held that the contract was concluded 05th September, when the letter of acceptance was posted and hence the defendants were held liable for breach of contract. This decision was followed by the subsequent cases. See Hentharm V Fraser 1892; Byrne V van Tien Hoven, Household Fire Insurance Co. V Grant 1879. In South Africa, in the case of Fern Gold Mining Co. V Tobias (1980), the Declaration Theory was rejected. In 1902 in Bal V Van Standen, Soloman J cited with approval a dictum of Lord Balciburn is support of the Expedition theory. As Divisional Bench in University of Ceylon Vs Franando (UKPC 6, 1 All ER 631, 1 WLR 223 ) said that in relation to a transmitting of a notice where the post is used as a medium of transmitting it, a properly addressed letter duly posted was sufficient. This dictum is in favor of the Expedition theory. 9.5.3 Manner of Acceptance Acceptance may be communicated in any manner. If the offeror states expressly or by implication the mode of acceptance, then the acceptance must be in that manner. In an American case of Eliason V Henshaw (1819) 17 U.S. 225 )1819, A offered to buy flour from B and requested that an answer should be sent by the Wagon which brought the offer, B accepted by post. It was held that there was no contract as A was entitled to refuse the acceptance as his offer had not been accepted in the manner indicated. However, when the offer is required to be in a particular form by law there is no requirement that the acceptance must be in that form; see Muthukuda V Sumanawathi. Recommended reading Weeramantry, C. G. (1967). The Law of Contracts. Mortlake Press. Anson’s Law of Contract, Harlow Beaton, Oxford University Press, Oxford. Contract Law, Text, Cases and Material, McKendrick E, Oxford University Press, Oxford. Summary A contract is an agreement which includes two elements such as an offer and an acceptance. Four elements should be present in a legally enforceable contract. An offer should be 18 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 09: Main Requirements of a Valid Contract classified in to open offer, cross offer, and counteroffer. An offer should be distinguished from an invitation to treat and should be definite, curtain and communicated. An acceptance is a final and unqualified expression of assent to the terms of the offer Acceptance must be by the offeree. A unique acceptance must be communicated to the offerer through either inter presenter or inter absenter such as by post/telex/fax. Unless there is a valid acceptance, there could not be a valid and legally enforceable contract. Learning Outcomes After completing this session, you will be able to; Compare and contrast an offer and other related terms. Understand and analyze the different ingredients that are necessary for a legally enforceable contract. Identify and analyze the legal requirements for a valid offer and distinguish between an offer and invitation to make an offer. Understand the concept of acceptance. Distinguishing features of acceptance from the term offer. Review Questions 1. Compare and contrast an offer with other related terms such as invitation to treat, negotiation, and mere puffery. Discuss the distinguishing features of an offer that differentiate it from these other concepts, providing examples to illustrate the differences. 2. Joseph advertises his car for sale at 8000 0000 Rupees. Janaki sees the advertisement and expresses her interest in buying the car. Is Joseph's advertisement considered an offer? Discuss the distinction between an offer and an invitation to make an offer in this context. 3. Supuni offers to sell her bicycle to Anushka for 200 000 Rupees, and Anushka responds by saying he needs some time to think about it. A week later, Anushka contacts Supuni and accepts the offer. Is there a legally enforceable contract between Supuni and Anushka? Compare and contrast an offer with a counteroffer in this situation. 4. Analyze the essential ingredients necessary for a legally enforceable contract. Discuss the key elements, such as offer, acceptance, consideration, intention to create legal relations, and legal capacity. Explain how these ingredients work together to form a binding agreement. 5. Anura sends an email to Bandara, offering to sell his laptop for 500 000 Rupees. Bandara replies, accepting the offer but proposes to pay 450 000 Rupees instead. Is 19 Copyright © 2023, The Open University of Sri Lanka (OUSL) Unit VΙ – OSU4404 Session 09: Main Requirements of a Valid Contract there a valid contract between Anura and Bandara? Analyze the concept of acceptance and its implications in this scenario. 6. Identify and analyze the legal requirements for a valid offer. Discuss the elements that make an offer legally effective, including specificity, certainty, communication, and intention to be bound. Differentiate between an offer and an invitation to make an offer, highlighting the legal implications of each. 7. Understand the concept of acceptance and its significance in contract law. Explain the requirements for a valid acceptance, such as communication of acceptance, unconditional acceptance, and acceptance within a reasonable time frame. Discuss the legal consequences of a valid acceptance in forming a contract. 20 Copyright © 2023, The Open University of Sri Lanka (OUSL)