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The Six Elements of a Valid Contract

A contract shows a promise being made for doing something and for paying the consideration value. In order to form a binding contract, there is a need to show that six different elements were present under the contract. These six elements include the offer, acceptance, a valid consideration, intent of parties, clarity of terms and contractual capacity (Clarke & Clarke, 2016). These have been further detailed below.

To form a binding contract, the first step is making an offer by one party to another. So, one party has to offer some terms which form the basis of the contract to the other party. It is important to differentiate in between an offer and an invitation to treat (Ayres & Klass, 2012). This is because an offer defines an intention to create legal relations and to enter into the contract. However, when an invitation to treat is made, it shows that the parties want to negotiate and could enter in a contract (Andrews, 2015). The differentiation of this can be clarified through the case of Pharmaceutical Society of Great Britain v Boots [1953] 1 QB 401 where it was stated that the goods kept on shelf is an invitation to treat and not an offer. The adverts in the newspaper in general are taken as an invitation to treat as was seen in Partridge v Crittenden [1968] 2 All ER 421, unless the same contains a unilateral offer which would make it an offer as was seen in Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256 (Latimer, 2012).

Once an offer has been made, it is crucial to obtain an acceptance on the same is obtained and the person, to whom the offer was made, has to give the acceptance. It is also important to accept the offer as has been made without altering it, or else a counter offer is made as was seen in Hyde v. Wrench (1840) 3 Beav 334 (Marson & Ferris, 2015). Another important aspect about acceptance is that it has to be properly communication and a silence could not be construed as acceptance, as was seen in Felthouse v Bindley (1862) EWHC CP J35 (Stone & Devenney, 2017).

Consideration is the third element of the contract and in absence of valid consideration, the contract is not binding. Consideration has to move from the promisee, has to be sufficient and not adequate (Mulcahy, 2008). It needs to be mutually decided by the parties and needs to have the economic value, or else the consideration would not be valid as was seen in White v Bluett (1853) 23 LJ Ex 36. The three wrappers were held to be a valid consideration resulting in binding contract in Chappell & Co Ltd v Nestle Co Ltd [1960] AC 87 (Latimer, 2012).

Oral and Written Contracts

Another requirement of contract formation is that the parties need to have the legal capacity to enter into a contact. This means that the parties have to have sane mind and even have a legal age. Though, for specific cases, the minors are permitted to enter into the contract. The next requirement is for the clarity in the terms of the contract. It is important that the terms of the contract are clear to all the parties. This is important so that the ambiguity does not result in the contract being deemed as unenforceable (Gibson & Fraser, 2014). The last requirement in contract formation is the intention of the parties. It is important that the parties are aware that by forming a contract, they would become legally obligated to fulfil the terms of the contract. And so, it is crucial that the parties have the intent of entering into lawful relationship with the other party. Once all the six elements are found to be present in an agreement, the agreement transforms into a legally binding contract (Lambiris & Griffin, 2016).

A contract can be formed broadly in two manner, i.e., in written or in oral manner. In an oral contract, the terms on which the contract is to be formed are orally spoken and an agreement is attained, resulting in an oral contract. A written contract is however, different from an oral contract and in this, the terms of the contract are put down in writing and the contracting parties sign the document on which these terms are stated. Even though both written and oral contracts are binding in nature, it is always advised to opt for written form of contracts, owing to not one, but numerous reasons (Mau, 2010).

Once a written contract has been signed, the parties become bound by the terms covered under the contract. In case a default is made in keeping the terms of the contract, the aggrieved party gets the option of initiating a case against the breaching party for a breach of contract. This allows the aggrieved party to claim equitable and monetary damages. And the written contracts also help in clarifying the applicability of limits under the statute of limitations (Irby, 2016). The written contracts also help in clarifying and resolving the ambiguity for a certain term under the contract. Each party clearly knows their obligations and their rights and liabilities which could not be denied as the same have been put down in writing.

The Importance of Written Contracts

However, when an oral contract is formed, the ambiguity in the terms of the contract cannot be clarified as they cannot be interpreted properly. This is also because each party can state that the term was stated in a different manner, thus, resulting in a dispute being raised. This is not the case in written contracts as the law of interpretation helps in attaining a proper meaning even of the ambiguous terms. Also, in oral contracts, the parties can deny a particular task had to be done or regarding their liabilities for a breach of contract, claiming that the breach never took place as the promise was not made for fulfilling the disputed obligation. Most importantly, the written contracts, in majority cases provided the manner in which a dispute is to be resolved which is not present in oral contracts (Pendragon, 2014).

A formal contract can be defined as a contract which is signed by the contracting parties under a seal. Any such contract which needs a special method or form for its creation, for its enforceability, is deemed as a formal contract (Miller and Cross 2015). The basics of any contract, i.e., the six elements of contract formation have to be present in a formal contract also. So, in a formal contract, there needs to be offer, acceptance, a valid consideration, intent of parties, clarity of terms and contractual capacity (Clarke & Clarke, 2016).

Depending upon the type of formal contract, the formalities are decided. Some examples of formal contracts include drafts, certificate of deposits, promissory notes and cheques. For instance, for a valid cheque to be made, the payment must be clearly stated, the cheque must be signed, it must have the requisite details of the bank and that of the person drawing it, and are usually crossed (Legal Services Commission, 2017). In this regard, in a cheque, the cheque is an offer, where the amount of consideration is stated, and the same is accepted when the person accepts the cheque and puts it in his bank for clearance. The intention is present as the same is a legal document, which is drawn for fulfilling the terms of the contract. Lastly, the parties are deemed to have the contractual capacity, as the cheque cannot be drawn by an insane mind person or a minor, without the sign of their guardian or custodian. Hence, a cheque is a formal contract for the presence of the six elements of a contract. 

Issue

Formal Contracts

The key issue in this case revolves around the validity of the contract formed between the groups and if a contract was formed, the breach of the contract and the resulting remedies.

Rule

The contract needs to have the requisite elements stated earlier, for creating a legally binding contract. The social arrangements which take place between two or more parties are not deemed as enforceable contracts in the court of law, owing to the fact that the required intention to form legal relations is absent. However, where it can be established that the intention of parties was present to create a legal contract in a serious manner, the contract is deemed to have been formed. In Simpkins v Pays [1955] 1 WLR 975, a lodger, grandmother and granddaughter entered in the weekly competition though the coupon was only in grandmother’s name. It was agreed that the winnings would be shared between the three and regularly contributed towards the payment of the competition. When they won, grandmother got the price money; though, she refused to share the same with the other two and so, the lodger made a claim for 1/3rd of the prize money. It was held by the court that a binding contract had been created in this and the claim of absence of legal relations was rebutted (E-Law Resources, 2017).

Application

In the given case study, the purchaser group denied the sharing of the prize money claiming that the arrangement was purely a social one and the intention of forming legal relations was absent. However, the same is not true. To show that this was not a social arrangement, the intention of the parties needs to be proved. For this, the case of Simpkins v Pays, is of assistance. There are lot similarities between the case study and the quoted case. In both the cases, the parties contributed towards the purchase of ticket and the ticket was commonly bought by them. After winning the prize, the party in whose name the ticket was bought denied to share the prize citing absence of legal relations. However, the same is present as the parties had a clear intent of creating a contract by coming together, purchasing the ticket and sharing the profit. And as the same was denied by the group which purchased the ticket, a breach of contract can be claimed upon by the other groups, whereby they can claim their share of the winning prize, as was done in the quoted case.

Key Issues with Contract Validity

Conclusion

In short, a valid contract was present between the parties due to the presence of intention element in this contract. And the denial of sharing of the prize amount would be deemed as a breach of contract, for which the aggrieved party can claim their share of the winning amount.

Agency law is a common law through which, the work undertaken by the agent, or for the actions undertaken by the agent, the principle is held accountable towards a third party, with which the agent underwent the transaction in question (Thampapillai et al, 2015). An important concept which is born out of the agency law is of vicarious liability. As per this concept, the superiors are made accountable for the acts done by their own subordinates, towards the third parties, with which the subordinates interacted on behalf of the superior (Giliker, 2010). The agency law and the concept of vicarious liability are the reasons for differentiating between an agent and an independent contractor. However, before explaining this reason, there is a need to understand the difference between the two sets of individuals.

An agent is a person who acts under the control or under the supervision of the principal and is bound to follow the instructions given by the principal. Further, for the acts undertaken by the agents, the principal is bound owing to the agency law. An independent contractor, on the other hand, is a person who uses his own equipments, materials, labour and machines to carry out the terms of the contract, by which he is bound. For the acts of the independent contractor, the principal or the employer cannot be bound (Miller & Jentz, 2007).

An independent contractor, as the name suggests, works independently, and for their faults, they are liable on their own. For the acts of an independent contractor, the person with which such contractor contracted is not made liable; however, for the acts of the agent, the employer or the principal is made liable. This is because the independent contractor only has to undertake the work that has been assigned to him and does not work on behalf of the principal. However, in case of agents, they act on behalf of the principal and as they represent the principal in their dealings, they are made accountable. This is due to the fact that the third party is not aware that the agent has the requisite authority or not, but just knows that the principal has given the authority to the agent to act on their behalf. And as it becomes clear that the principal is actually being dealt with, owing to the representation through agency law, the principal is made liable. And this is the very reason to differentiate between an agent and an independent contractor, so that the liability of the principal can be fixed in cases of agent and for the independent contractor to be made liable for the liabilities which are raised as a result of work undertaken by them.

References

Andrews, N. (2015). Contract Law (2nd ed.). UK: Cambridge University Press

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

Clarke, P., & Clarke, J (2016). Contract Law: Commentaries, Cases and Perspectives (3rd ed.). South Melbourne: Oxford University Press.

E-Law Resources. (2017). Simpkins v Pays [1955] 1 WLR 975 Queen's Bench Division. Retrieved from: https://www.e-lawresources.co.uk/Simpkins-v-Pays.php

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

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

Irby, L. (2016). What is a Written Contract When It Comes to Statute of Limitations?. Retrieved from: https://www.thebalance.com/written-contract-961146

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

Latimer, P. (2012). Australian Business Law 2012 (31st ed.). Sydney, NSW: CCH Australia Limited.

Legal Services Commission. (2017). Paying and collecting a cheque. Retrieved from: https://www.lawhandbook.sa.gov.au/ch10s05s02s01.php

Marson, J., & Ferris, K. (2015). Business Law (4th 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 (8th ed.). Mason, OH: Thompson Higher Education.

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

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

Pendragon. (2014). The Benefits Of A Written Contract. Retrieved from: https://pendragon.net.au/benefits-written-contract-2/

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

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

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