(Part One): The Elements 4 The Contract (Part One): The Elements

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…

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

Elements of a Contract: 1) Offer cont… Offers v. Invitations to Treat Shop Displays Advertisements Catalogues Sales Puffery Vending Machines Delicatessens

Elements of a Contract: 1) Offer cont… 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

Elements of a Contract: 1) Offer cont… Offer must be communicated Offeror to Offeree Mode of Communication Verbal/ Writing/Post Contemplation of the Parties

Elements of a Contract: 1) Offer cont… Termination of an offer An 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?

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?

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. 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

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

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) Express This 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?

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 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.