Essay: Components And Formation Of Contracts In Contract Law.

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.

Offer, Acceptance, Consideration, Intent, Capacity

1. A contract is a legally binding contract in which party X promises to do a particular task and party Y promises to pay the consideration, and can involve more than two parties. In order for a binding contract to exist, there are some components which have to be present (Andrews, 2015). These components include offer, an acceptance, consideration, consent, capacity, clarity and intent. A brief of these, with a particular reference to established case laws have been presented herewith (Ayres & Klass, 2012).

The first component in contract formation is an offer, whereby some terms are offered by one party to the other, which forms the base of the contract. It becomes crucial to differentiate between an offer made and an invitation to treat. A controversial issue is raised in differentiation between the two when it comes to the adverts placed in magazines, newsletters and newspapers (Clarke & Clarke, 2016). For instance, in the case of Partridge v Crittenden [1968] 2 All ER 421, the court formed the view that the advertisement was an invitation to treat. However, the terms of advertisement in Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256 were such that they could be accepted merely by acting on it and thus the advert was actually an offer instead of an invitation to treat. Where an invitation to treat is established, the seller is not bound to sell the product which are kept on the shelf of their shop, as was held by the courts in Pharmaceutical Society of Great Britain v Boots [1953] 1 QB 401 (Latimer, 2012).

The second component required for creating a contract lies in the acceptance. The acceptance has to be given by the party to which the offer had been made and in the exact manner in which the offer had been made. If the offer is changed while communicating the acceptance, it would be considered by the court as a counter offer and a prime example of this is Hyde v. Wrench (1840) 3 Beav 334; further, the original offer expires in such cases (Marson & Ferris, 2015). The acceptance has to be communicated properly and a silence is not taken as an acceptance and a prime example of this is Felthouse v Bindley (1862) EWHC CP J35, where the acceptance was not held to be given (Stone & Devenney, 2017).

The next element in contract formation is consideration which is mutually decided between the parties and can be any amount so long it has an economic value. Owing to the condition precedent, the three wrappers were deemed by the court as being valid in the matter of Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87. The lack of economic value resulted in consideration not being valid and an example of this is White v Bluett (1853) 23 LJ Ex 36 (Latimer, 2012). Consideration is also required to move from the promise. And it does not have to be adequate, but sufficient (Mulcahy, 2008).

Written vs Verbal Contracts

The next component in contract formation is the need of the parties to have the intention of creating a contract whereby legal relations would be formed between them. This would mean that the contracting parties would be legally bound by the terms of the contract and would have to bear liability for breach of the contract (Gibson & Fraser, 2014). Another component is the consent, which represents a free consent to enter into legal relations, without any duress, stress or pressure from another party. There is also a need for the component of clarity to be present in the contract where they need to be clear about the terms which form the contract. The last component in contract formation is the contractual capacity of the parties whereby they need to be of sound mind and need to have the legal age (Lambiris & Griffin, 2016).

2. Contracts do not necessarily have to be in written form as there are two methods of creating any contract, i.e., verbal and written. In verbal contracts, the terms of the contract are spoken and agreed upon in a spoken manner. And in written contracts, these terms are properly stated on a paper which is then signed by the parties of the contract. Even though there is a difference in the manner of contract formation, both verbal and written contracts continue to be binding (Mau, 2010).

Indeed, both the verbal and written contracts are valid; it is always preferable to draw up written contracts, due to different reasons. This is because in a written contract the terms are properly stated and defined where by the ambiguity regarding a term is not formed and even when the same is done, by applying the statutory provisions of the interpretation legislations, the same can be construed on the basis of the theme of the particular contract (Irby, 2016). Also, the written contracts help in clearly stating what the rights and liabilities of each of the party is clearly stated. This also gives the parties the right to make a case against the other party for breaching the contract as the performance of the terms is clearly provided in the contract.

Though, when the verbal contracts are made, there is always a claim made that a particular right was not available or that the particular liability was never a part of the originally drawn contract. The verbal contracts do not cover the terms which are generally present in the written contracts whereby it is stated that in case of dispute a particular thing has to be done (Pendragon, 2014). Hence, the dispute resolution in cases of written contracts is easier in comparison to the verbal contracts. One point which proves favourable for the verbal contracts is that they are easy to form and save both time and costs. But due to the difficulties which have to be faced by the parties in cases of verbal contract it is preferable to draw up written contracts.

Formal Contracts

3. A formal contract is referred to as the contracts which are formed or which require a particular method of formation to be enforceable (Miller & Cross 2015). A formal contract is formed when the same is signed by the parties of a contract under a seal. The formality of the formal contracts is dependent upon the kind of formal contract being entered into. The different types of formal contracts which are available at present include drafts, cheques, certificate of deposits and the promissory notes. The formalities of promissory notes include the declaration that the promise has been made by the drawing party to pay the bearer certain amount. It has to be properly signed by the party having the relevant authority (US Legal, 2017).

Whether a contract was formed in this case, particularly with regards to the intention of the parties, or not? Whether the contract was breached in this case, resulting in remedies being available to the aggrieved party, or not?

As has been covered in the previous segment, the contract formation requires certain components to be present and one of these components is intention of the parties. The intention of the parties shows that they want to enter into legal contract and are serious about creating lawful relations owing to the contract formed being binding in nature. In the case of Trevey v Grubb (1982) 44 ALR 20, a tattslotto entry coupon was lodged by an individual on behalf of the three members of a syndicate and ultimately, the price was won. The defendant however denied sharing of the prize money which led to the plaintiff making a claim against the defendant. The court analysed the presence of intention of the parties and made reference to the case of Simpkins v Pays [1955] 1 WLR 975 and stated that there were similarities between the two cases and also there was a presence of the required intention. And so, a legally binding contract was present instead of a social setting in this case. And so, the court made the order to the prize money to be distributed equally between the three parties (Gibson & Fraser, 2013).

When the terms of the contract are not fulfilled as per the promise made under the contract, the aggrieved party gets the option of making a claim for breach of contract against the breaching party and apply for damages (Latimer, 2012).

The case study highlights that the award winning group made a claim of the arrangement being a social one and not a legally binding contract. In order to prove them wrong, the case of Trevey v Grubb proves to be of help. There are a lot of similarities in this case and the given case study and so, the ruling of Trevey v Grubb can be applied here. As an intention was present in this case due to the contribution of parties in the ticket purchase, a contract would be deemed to be present. The denial of sharing the prize money would be deemed as a breach of this contract and due to these reasons the other groups can make a claim against the winning party, which would allow them to share the prize money equally as was seen in the case of Trevey v Grubb.

Examples of Formal Contracts

C: Conclusion

Hence, a contract was formed in this case, particularly due to the presence of the intention of the parties. Also, the contract was breached in this case, resulting in remedies being available to the aggrieved party whereby they can apply for the prize money to be distributed between them in an equal manner.

5. One of the common laws applicable in different nations is the agency law. Under the agency law, the principal is held liable to the third party for the work done by their agents as the principal gives the agent the authority to do work on their behalf and they represent the principal before the third party (Thampapillai et al, 2015). Vicarious liability is a principle borne out of the agency law, whereby the employers are held liable for the work done by their employees to the third parties, due to the employee working for the employer (Giliker, 2010). The liability arising for the employers and for the principals is the reason for make a clear differentiation between the agents and the independent contractors. The differences between the two have been further elucidated below.

Agent can be denoted as an individual who works under the directions and supervision of his principal and is obligated to adhere to the instructions laid down by the principal. And the agency law makes the principal liable for the acts undertaken by the agents. Alternatively, the independent contractors are such individuals who make use of their personal materials, equipments, machines and labour for fulfilling the contractual terms. And for the acts of the independent contractor, the contractor is liable instead of the principal (Miller & Jentz, 2007).

Independent contractor denotes by their very name that the worker works in an independent manner and they take full liability for the work they do. Conversely, for the acts of the agent, the principal is liable. The rationale behind this is that the independent contractor does the work which has been contracted out to him, but the agents can often go beyond their expressly given authority in manner of apparent or actual implied authority. The presence of the authority with the agents makes the principal liable. The liability is fixed on the principals as they are not aware of the presence/ absence, or the magnitude of the authority available with the agent. And when the agent presents the principal, they are deemed to have the requisite authority, till the time the contrary can be proven. Hence, the reason for differentiating between the agents and independent contractors lie in the imposition of liability on the principal for the actions and their liabilities arising due to agency law.   

References

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Ayres, I., & Klass, G. (2012). Studies in Contract Law (8^th ed.). New York: Foundation Press

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Gibson, A., & Fraser, D. (2014). Business Law 2014 (8^th ed.). Melbourne: Pearson Education Australia.

Giliker, P. (2010). Vicarious Liability in Tort: A Comparative Perspective. Cambridge: Cambridge University Press.

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Lambiris, M., & Griffin, L. (2016). First Principles of Business Law 2016. Sydney: CCH.

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Marson, J., & Ferris, K. (2015). Business Law (4^th ed.). Oxford: Oxford University Press.

Mau, S.D. (2010). Contract Law in Hong Kong: An Introductory Guide. Hong Kong: Hong Kong University Press.

Miller, R., & Jentz, G. (2007). Cengage Advantage books: business law today: the essentials (8^th ed.). Mason, OH: Thompson Higher Education.

Miller, R.L. & Cross, F.B. (2015). The Legal Environment Today (8^th ed.). Stanford, CT: Cengage Learning.

Mulcahy, L. (2008). Contract Law in Perspective (5^th ed.). Oxon: Routledge.

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Stone, R., & Devenney, J. (2017). The Modern Law of Contract (12^th ed.). Oxon: Routledge.

Thampapillai, D., Tan, V., Bozzi, C., & Matthew, A. (2015). Australian Commercial Law. Melbourne: Cambridge University Press.

US Legal. (2017). Promissory Notes Law and Legal Definition. Retrieved from: https://definitions.uslegal.com/p/promissory-notes/