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Main Components of Contract

Discuss About The Fundamentals A Business Law Revised Edition?

A contractual relationship exists when the parties formulate a contract amid themselves. A contract is an outcome of mutual exchange of promises. When an offeror and an offeree exchange promises amid them with the intention to abide by the same legally, then, there is formation of contract. (Barron, 2013)

An offer – A proposal sent by an offeror to an offeree with a view of approval is an offer. An offer is a resemblance of the intention of the offeror which is conveyed to an offeree(Australian Woollen Mills Pty Ltd v The Commonwealth, 1954). The intention of the offeror signifies his wish to conduct any act or inaction which he desires from the offeree to approve.


An offer can either by written or oral but must be clear and unambiguous. The offeror may send the offer to people at large or one person but to whom so ever the offer is made, the offeree must be identified in law (CAMPBELL v THE UNIVERSITY OF ADELAIDE, 2006).

An acceptance – An acceptance is the intention of the offeree which is communicated back to an offeror. The communication is the approval of the offer that is sent to him (Carlill v Carbolic Smoke Ball Company, 1892). It is necessary that the acceptance must be the mirror image of the offer in order to be valid. If changes are brought in while accepting the offer then it is not an offer in law. Rather, it is counter offer which cancels the original offer and it is the counter offer which becomes the new offer in law(Hyde v Wrench, 1840).

Consideration – A consideration is value for promises which is moved from one party to another. It is a value which supports the promises and makes such promises enforceable in law. Consideration can be anything of value and need not be sufficient in law(Placer Development Ltd v Commonwealth, 1969).

Legal intention – The intention of the offeror and the offeree when marketing the offer and the acceptance must be such which portrays legal intention, that is, the promises must be made by the parties with consent that in case of dispute they are willing to go to the court of law. Legal intention is presumed to be present in commercial contract and absent in social contract but this presumption is rebuttable in law(Ermogenous v Greek Orthodox Community of SA Inc, 2002).

Valid Contract Formation

Capacity – The offeror and the offeree must be persons of capacity, that is, they must be mentally sound, should not be minor and are not barred by law. (Latimer, 2015)

When all these five components are comply with by the parties, then, there is a valid contract that is established which has the enforceability in law.


A contract is the combination of five core elements, that is, offer, acceptance, intention, capacity and consideration. These five core elements are prime ingredients of any contract formation. With the help of these elements two types of contract can be formed. (Graw, 2014)

When the contract is made with the help of words, then, such are oral contracts. When the offeror makes the offer verbally which is accepted by the offeree verbally and all other contract essential are present then it is an oral contract. When the offer and acceptance is exchanged amid the parties with the help of pen on the piece of paper, then, it is a written contract. (Findlaw, 2017)

Both of these contracts are valid and enforceable in law. The only requirements are that all contract essentials must be present. So, there is no need that the contract must be in writing in order to be binding in nature.

However, when analyze from the point of view of enforceability then the written contracts are preferable when compared with the written contract. The main reasons as to why a written contract is preferable against oral contracts are, firstly, the contents of the written contract can be easily determined by reading and if the parties or the court does not able to understand the term then the term can be interpreted by reading the written terms; secondly, people tend to forget and if the terms are in written form then it is easy to determine the true intentions of the parties; thirdly, it is one of the best evidence that is normally relied upon by the courts; fourthly, a written contract depicts the intention of the parties at the time when the contract was actually established by the parties. (Findlaw, 2017)

Because of these reasons it is found that the written contracts are better than oral contracts. Though both are valid but when it comes to proving the terms of the contract, written contracts are considered to be better in nature.

A contract is a legal document which is formed by persons by making an offer, accepting the same, combined with consideration with legal intention and the parties making the same must be capable enough to enter into the contract. (Latimer, 2015)

Types of Contracts

With the help of these contracts the parties are able to make oral contracts or written contracts which are binding in nature. These are another kind of written contract that are normally established by the parties and is called formal contracts mainly because there are few formalities which needs to be accomplished by the parties. normally formal contracts are of two kinds; firstly, those contracts which are established by the parties in the form of deeds, that is, the contract is signed by the parties and witnessed by at least one person; secondly, those contracts which are derived from the court judgments, that is, to remain calm and composed, maintain peace, etc. These are the two kinds of contracts which are different from a written contract mainly because there are few formalities which are require to be prove. Now, what are the basic formalities which need to be accomplished in order to make a written contract into a formal contract? The basic formalities are: (Christensen & Duncan, 2009)

That the contract must be in writing and is the basic necessity of every formal contract;


That the contract must be signed by the parties. it is very necessary that the contract must be signed by the parties in order to categories the contract as formal contract;

That the contract is an exchange of promises amid the parties. It is not necessary that the contract should be supported by any kind of consideration to make it enforceable in law;

When these contracts are established then the contracts are enforceable for a period of twelve years. This is the life span of these contracts and after that they cease to exist.

Is the contract that is established amid the group of friends socially is binding in nature or is not enforceable because of lack of legal intention?A valid contract requires few contract ingredients to make it valid and enforceable in law. The same are offer, acceptance, consideration, legal intention and capacity of the parties. The offeror must make an offer to an offeree which should be accepted by the offeree without any variation. This offer and acceptance is called an agreement and when made by capable parties along with consideration with legal intention then there is valid contract amid the parties. (Latimer, 2015)

In order to make a contract enforceable in law and does not fall into the category of social gathering or communication, it is very necessary that the intention when the promises are exchanged amid the parties should be with legal intention. Legal intention signifies that the parties are willing to comply with the terms of the contract legally, that is, if any dispute arises then they intent to go court for settlement.

Enforceability of Oral and Written Contracts

The law has made presumptions regarding the legal intention of the parties. It is submitted that the court considers that there is no legal intention amid the parties if the parties are sharing cordial, family, social and friendly relationship (Ermogenous v Greek Orthodox Community of SA Inc, 2002). It is also presumed by the courts that there is no legal intention amid the parties if the parties are in commercial or business management relationships (J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd , 1976). But, this basic supposition of  law can be disregarded by the court if the parties are capable enough to prove the same otherwise with the help of evidence (Snelling v John G Snelling Ltd, 1969).

In ( Simpkins v Pays, 1955), it was held that the parties are friends when they bought a lottery ticket but they intend to share the prize. Thus, there is business relationship that is intended by the parties. So, there is legal intention and the contract is enforceable in law.

The law is now applied to the facts of the case.

It is submitted that few friends meet at the hotel for drinks. Every person contributed $ 2 for a lottery and one person is given responsibility to buy the ticket.

It is submitted that when the lottery was announced, the friends won the prise but the buyer of the ticket (one of the friends) claim that there is no contract between them as there can be no contract amid friends  (Balfour v Balfour, 1919).

But, as per ( Simpkins v Pays, 1955) since the main intention of the friends was to share the money and not to carry out the transaction in the friendly manner. Thus, there is business relationship amid them.

When a person employees another person then the person who employs is called an employer or principal and the person who is employed is called an employee. Now, the employee can be an agent of the employer or the independent contractor of the employer depending upon the control the employer exercise upon the employee.

When the employee is the agent of the employer then the employer exerts control upon the agent and delegates certain tasks upon the agent which he must furnish. An agent is the person who carries out the functions of the employer to the extent he is authorized to do so. Beyond that an agent is not allowed to represent the employer in front of the third parties (SCOTT V DAVIS, 2000).

Formal Contracts: Definition and Basic Formalities

Thus, from the employer’s point of view an employer is liable for only those actions of the agent for which the agent is authorized. The liability of the authorized actions of the agent falls upon the principal.

But, the case is different if the employee is the independent contractor of the employer. When the employee is the independent contractor, than, he is not the authorized repetitive of the employer. Rather, he is not working under the control of the employer and the tasks that are granted to the contractor must be carried out by him with his own free will. He is allowed to decide the time of work, place of work, the people required to carry out the work, etc (Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-Operative Assurance Co, 1931).

Thus, from the principal point of view, the liability that originates by an independent contractor while carrying out the task is wholly upon the independent contractor and the principal is nowhere accountable for the same. (MCCARTHY, 2004)

Thus, it is very important to distinguish between a party who is an agent for a principal, from that of an independent contractor, mainly because to determine the liability of the principal.

If the relationship is with an agent then the principal can be liable for authorized act and if thee relationship is with contractor then the principal is not held liable.

References

Simpkins v Pays (1955).

Australian Woollen Mills Pty Ltd v The Commonwealth (1954).

Balfour v Balfour (1919).

Barron, M. (2013). Fundamentals of business law revised edition (7th ed.). . Australia: McGraw Hill Education. .

CAMPBELL v THE UNIVERSITY OF ADELAIDE (2006).

Carlill v Carbolic Smoke Ball Company (1892).

Christensen, S. A., & Duncan, W. D. (2009). Sale of Businesses in Australia. Federation Press.

Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-Operative Assurance Co (1931).

Ermogenous v Greek Orthodox Community of SA Inc (2002).

Findlaw. (2017). Is a verbal management legally binding? Retrieved September 19, 2017, from Findlaw: https://www.findlaw.com.au/articles/5626/is-a-verbal-agreement-legally-binding.aspx

Graw, S. (2014). An introduction to the law of contract (8th ed.). . Australia: Law Book Co. of Australasia. .

Hyde v Wrench (1840).

J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd (1976).

Latimer, P. (2015). Australian business law (34th ed.). . North Ryde: CCH Australia.

MCCARTHY, L. (2004). VICARIOUS LIABILITY IN THE AGENCY CONTEXT.

Placer Development Ltd v Commonwealth (1969).

SCOTT V DAVIS (2000).

Snelling v John G Snelling Ltd (1969).

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