1. List and explain briefly each of the components required to demonstrate that a binding contract exists.
2. Does a contract have to be in writing to be binding? In your answer explain whether this is the case, and further whether it is a good idea to put an agreement in writing.
3. What is a formal contract? Explain the 'formalities' of such a contract and give two examples.
4. A group of friends meet for a regular drink at a hotel every Friday night. Each contributes $2 towards a group lottery ticket, which is drawn over the weekend by Lotto company. One of the group is given the role of actually buying the syndicate ticket. When in fact a winning ticket is drawn for the group the purchaser of the ticket claims the arrangement is purely social and there is no arrangement whereby he needs to share the prize. Analyse this issue in terms of contract law.
5. Why is it important under law to distinguish between a party who is an agent for a principal, from that of an independent contractor? In your answer explain the legal implications of each relationship.
Components of a Binding Contract
1. There are several requirements which must be completed in order for a contract to be legally binding by the law. According to Treitel (2003), the provisions and regulations of England’s contract law have significantly influenced the law of contract in Australia. Following are the requirement necessary for the legally binding contract:
- Agreement: To establish an agreement between two parties it is necessary that there must be an offer and acceptance. As per Carter, Harland, and Lindgren (1996), an offer can include performance or non-performance of a specific activity and the person presenting the offer is known as ‘Offeror’. Other parties who are known as ‘Offeree’ must accept such offer without altering or introducing new terms in the agreement.
It is necessary that parties of the contract must not change or alter its conditions, or else the agreement cannot be established. The condition or task of an offer must be legal, in case an agreement is conducted for illegal activities than such agreement will be void ab initio.
- Intention: As per Peden (2011), intention means motive or will of the parties for entering into a contract. It is necessary that both the parties to the contract must have a similar intention for entering in the contract. If the parties sign a contract but both of them have separate intentions, then such contract will be void. The intention of the parties to a contract must be acquired by without using any force or illegal activity.
- Consideration: It is the payment made by one party in lieu of the promise made by another party in a legal contract. Smith and Atiyah (2006) provided that the consideration provided in a legal contract must have certain worth and it must be legal. Without a valid consideration, a contract cannot be established in-between two parties. The consideration of a contract must have monetary value and the worth must be certain and fix, for it to be valid.
- Capability: While entering into a legally binding contract, it is necessary that parties of the contract must understand its terms and capable to enter into such contract. According to Paterson (2009), the parties must be of legal age to enter into a legal contract, in Australia, the parties must be 18 years old or above. The parties must be sound minded meaning they easily understand the condition of contract and know its legal implications. Another requirement is that none of the party of the contract must be declared insolvent by the court.
- Certainty: The conditions or the terms of the legal contract must be contained and fixed. According to Carter and Peden (2003), the terms cannot be changed by the will of any party; to change such terms, permission of both parties must be necessary. If any party added or removed any terms form the contract, another party shall not be legally binding to perform such activities.
2. To bind a contract upon parties, it is not essential that such contract must be written. The validity of a contract is depending upon various factors, for example, there must be an offer and acceptance. The offer provided by offeror must be accepted by offeree without change or alteration in the terms of agreement. As per Governatori and Milosevic (2006), a valid and legal consideration must be available in the contract which has certain monetary value. The intention for the acceptance of contract’s term must is acquired without any illegal force. The parties of the contract must not be minor, insolvent or unsound minded. The term prescribed in the legal contract must be fixed. After complying with above provisions, a contract can be legal in any form, either oral or written. The legal status of both contracts is similar in the eyes of law and both of them are legally binding upon the parties to contract.
The parties of a contract can decide the format according to their requirements. But, in case of an oral contract, it became difficult for parties to enforce its terms when there is no witness available while the contract was established. Arrighetti, Bachmann, and Deakin (1997) provided that if there is no witness available, the parties of contract can deny its conditions or provided new conditions which were not available in original contract. It is difficult for parties to provide the evidence for the effectiveness of a legal contract.
Another problem of an oral contract is that if a long time has passed since the contract took place, then the parties of such contract started to forget its terms. Without a witness or proper evidence, it is significantly difficult for the court to enforce the terms of contract over the parties. The status of oral or written contract is similar in law but there are many difficulties faced by parties while executing the oral contract conditions. There is a high chance of vagueness in the condition of a contract when it is performed orally by the parties (Appleman, Appleman and Holmes 2016).
In case of a written contract, the conditions are written by parties which cannot be changed easily. As per Joughin (1998), the signature or seal of the parties ensures the authenticity of the written contract. When a party decided to change the condition of a written contract, they have to take permission from another party. The vagueness in the circumstances of a contract can be avoided by parties if the contract is conducted in written format.
Written Contracts vs. Oral Contracts
A written contract can be enforceable after a long time even if the parties forgot the terms of such contract. The conflict causes due to the vagueness of condition can be avoided by the parties if they enter into a written contract. Solan (2001) provided that the work of court also becomes easier since there is no requirement of proof or evidence. The written contract has more benefits as compared to an oral contract. For companies or businesses, the written contract is significantly better than oral since they enter into many contracts due to their daily activities. A written contract is better than oral since it ensures the implementation of contract’s terms over the parties.
3. Proper guidelines have been provided by law regarding the formation of a formal contract. There are several formalities which must be fulfilled by the parties in order to enter into a formal contract. A formal contract is different from normal contract since it does not require an essential element of normal contract to enforce its conditions. A formal contract does not require a consideration of its validity. Usually, a formal contract has a time limit of twelve months for its applicability. Following are two examples of formal contracts:
- Contract by Deed or Contract under Seal:These contracts are prescribed in a specific format and it requires a witness attestation for its validity. According to Ryall and Sampson (2009), the witness must be a third party who has no interest in the contract, such witness must put his signature and seal over the contract to attest the contract. The lease for buying a house or a deed of the loan taken for the car is an example of a contract of the deed.
- Contract of Record:The contract of record are the legal contracts, the intention of parties is not an essential factor in the contract of record. As per Ayres and Gertner (1989), usually, the intention of parties must match to for validity of a contract; the intention is not an essential part of the contract of record. The example of a contract of record includes the order passed by the court under a civil or criminal case. In a particular case, the order passed by the court will apply over the parties of such suit; the intention of such parties is not required. An injunction or summons issued by a court in a suit is also an example of a contract of record. The injunction or summon can force the parties to perform certain duties of the court which can be legally enforced without their intentions.
4. One of the essential requirements for a legal contract is the intention of the parties to such contract. Skyrms (2014), the parties to the contract must have a similar intention for legally binding the terms of such contract over themselves. Therefore, the contract established between family or friends in social situations cannot be legally binding by any of such parties because of the lack of intention. But, in several cases court has considered the social contract as legally binding if they contain the essential elements of the contract.
For example, in Simpkins v Pays (1955) 1 WLR 975 case, three friends decided to purchase a lottery ticket but only one of them has money to buy the ticket. They decided that other two friends will pay their share later and they bought a lottery ticket. After winning the lottery, the friend who bought the ticket said it was a social contract which cannot be enforceable by law. The court provided that all the parties have intention pay the amount of ticket which makes it a legal contract and the prize of the lottery must be divided between friends (Greig and Davis 1987).
In Trevey v Grubb (1982) 44 ALR 20 case, a similar decision was taken by the court. The friends who decided to purchase a lottery by pooling together their money are considered as the parties of a legal contract. All the essential requirement of a contract is met by them such as agreement, intention, capability, intention, and consideration. The court gives the order for equally dividing the lottery prize in-between friends.
In the given case, similar provisions are also applied; all the requirements of essential conditions of a legal contract are present in the case. The intention of parties was to enter into a legal contract at the same time; therefore, the claim made by a friend that their arrangement was social is not correct. The amount of prize should be divided into the groups of friends.
Formal Contracts and Their Formalities
5. The rule of vicarious liability is significantly important in Australian law of torts. McGlone and Stickley (2005) provided that the law of vicarious liability provided that principal should be liable for the illegal actions of his agent since the agent performs his duties according to his principal directions. In case of the relationship of an independent contractor and employer, the rule of vicarious liability does not apply. An agent and independent contract have absolutely unrelated relationships in the eyes of law.
In Australian law, the duties and responsibility of an independent contractor are prided under the Independent Contractors Act, 2006. As per Hall (2006), this provides the status of independent contractor and defines his liability towards his actions. The Fair Work Act, 2009 provides the provisions for the protection of the rights and status of an independent contractor. The contract between the independent contractor and his employer contains the description of the job and the relation of both the parties. The legal position of an agent is absolutely dissimilar than an independent contractor (Manson 1987).
The contract for service contains the provisions of agent-principal relationship. The actions of an agent are in complete control of his principal. Laffont and Martimort (2009) provided that the principal provide the work to his agent and also provide the method in which such job is performed by the agent. In case of an independent contractor, the employer did not have control over his activities. The employer hires the independent contractor for completing a job and method of such work is selected by the contractor. The negligent actions or illegal activities of an independent contractor did not apply to his employer and the employer cannot be held liable for such actions. The negligence of agent, however, makes the principal liable because the actions are controlled by the principal. It is necessary that both the relationships are defined correctly in a court, so that principal can be held liable for the negligence of agent.
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