Essay: the elements of a contract – law problem question

The conditions that determine the validity of the contract are complex and require considerable analysis to avoid breach of regulations that govern the law of contract. It is therefore important that a definition of what a contract is, should be outlined to guide the course of advice that may be extended to Muchimba Company Limited. The elements involved in a valid contract are also pertinent as much as what constitutes a contract. The essay will therefore attempt to give an overview of a contract before according a good portion on the probable advice.
The law of contract has crucial significance in the legal management of transactions and obligations in any economic system. Essentially, a contract is an agreement between two or more parties that the law will enforce. In general, damages that is, compensation are payable for loss suffered by one party due to the non-performance or poor performance by the other party to the contract. At common law, similar legal principles apply universally to all types of contracts. According to Monahan, ‘over time, the strict application of the common law has become somewhat subdued by the principles of equity, designed by the courts to restrain unconscionable contractual outcomes and promote justice.’
WHAT IS A CONTRACT?
It is vital for Muchimba Company Limited to appreciate the piece of advice based on the information. There is seldom a formal or general acceptable definition of the term contract. However, different scholars have come up with different propositions like Sir Guenter Treitel in his book entitled ‘The Law of Contract’ defines it ‘as an agreement giving rise to obligations which are enforced or recognized by law.’ On the other hand, Stone (2002) defines a contract as, ‘legally binding or valid agreement between two parties.’ He further submitted that, the law will consider a contract to be valid if the agreement contains all of the following elements:
1. offer and acceptance;
2. an intention between the parties to create binding relations;
3. consideration to be paid for the promise made;
4. legal capacity of the parties to act;
5. genuine consent of the parties; and
6. legality of the agreement.
He also intimated that an agreement that lacks one or more of the elements listed above is not a valid contract. Furthermore, it should be understood that, ‘a party to a contract is liable, not because he/she has made a promise, but because he/she has made a bargain.’ This and many more inputs submitted already and those to be outlined later point to the fact that there was an existing relationship in contract which could not be terminated arbitrary without consideration of legal repercussions.
ELEMENTS IN FORMING A CONTRACT
The elements have been highlighted above but can be elaborated in detail one after the other.
OFFER
‘It is the expression of willingness to contract on specified terms, made with intention that is to become binding as soon as it is accepted by the person to whom it is addressed.’ Other scholars like Stone (2002) describe an offer as, ‘a final statement or proposal by one person (offeror) to another person (offeree). The statement or proposal is usually made on certain terms and often follows a process of negotiation.’ In other words, it implies that an offer shall only exist when there is nothing further to negotiate ‘ either the offer is accepted or it is rejected. Going by the question at hand, Buchiclan Investments Limited made an offer which was not rejected in its state apart from Muchimba Company Limited setting a condition which requested for confirmation of order by post to validate it. Now, whether a statement amounts to an offer depends upon whether the offeree would reasonably interpret it as an offer and it is no doubt this was the case. This is an objective test and not a subjective test of what the actual offeree thought. To assist in determining whether an offer has been made, there are a number of rules that have been developed to make it valid. A valid offer must:
1. Be communicated by the offeror to the offeree; Buchiclan communicated in vivid terms to Muchimba Company Ltd the offer. An offer is ineffective until it is communicated by the offeror to the offeree. If the offeree is unaware of an offer, then it would be impossible to accept it. In R v Clarke , the court held that Clarke could not claim a reward for information he had given because, at the time he gave the information, he was unaware that a reward had been offered.
2. May be made to a particular person, a group of persons, or to the entire world; In Carlill v Carbolic Smoke Ball Co , the plaintiff (Carlill) saw a newspaper advertisement placed by the defendant (Carbolic) claiming that their ‘smoke ball’ would cure all sorts of illnesses including influenza. More importantly, the advertisement also stated that the defendants offered to pay ??100 to any person who used one of their smoke balls and then succumbed to influenza within a specified time. The plaintiff purchased their smoke ball and subsequently came down with a nasty bout of the flu. She sued the defendant for the ??100. The defendant argued, inter alia, that an offer must be made bilaterally (that is, an offer cannot be made to the entire world). The court disagreed and held that an offer can be made unilaterally (that is, an offer can be made to the entire world).
3. Must be clear and unequivocal; the offer was very clear and one of the terms contained therein had indicated the possible variation in the initial agreed contract price according to the cost and availability of materials.
4. Must be distinguished from ‘mere puffs’, a request for further information, or an ‘invitation to treat’. Offers must be distinguished from non-promissory statements made during the course of negotiations. Objectively, these statements are exaggerated and a reasonable person would not expect them to be true. For example, no reasonable person would believe that a toothpaste can really make teeth ‘whiter than white’.
ACCEPTANCE
An acceptance is an absolute and unqualified assent to all the terms that comprise an offer, (Stone, 2002). A valid acceptance:
1. Must be communicated by the offeree which Muchimba Company Limited did though attached a condition.
2. Must be made in response to an offer like in R v Clarke and correspond with the offer. In Evans Deakin Industries v Queensland Electricity Generating Board , the court held that, if the offeree’s acceptance seeks to vary the offer, it is usually construed as a counter offer that the original offeror may consider;
3. Must be made while the offer is still in force, and the company did what was necessary within the required time as in responding to the offer in general.
4. May be express, that is, oral or in writing; or implied from conduct. In Brogden v Metropolitan Railway Co , the defendant (Brogden) had been supplying coal to the plaintiff (Metropolitan) without a formal contract. Subsequently, the defendant was sent a draft contract which, after making a minor change to it, he signed, marked ‘approved’ and returned to the plaintiff’s agent. The plaintiff’s agent received the draft contract and it was locked away in a cabinet without being executed by the plaintiff. The parties thereafter proceeded to act as if there were a binding contract until a dispute arose between them some time later. The court held that a contract existed because the parties had acted on the basis that a contract existed. In other words, the acceptance of the offer by the defendant could be inferred from his conduct. Therefore, it appears to me that Muchimba Company Limited though setting a condition had implied to have agreed the terms in the offer communicated to them by Buchiclan as they did not object to the contents per se.
The case in Galauni Farms Limited v National Milling Company Limited had an important element of a counter offer. The plaintiff Galauni Farms had offered to sale wheat to the defendant of about 2000 tones according to the initial documentation which was signed by the respondent. However, because of some amendments made on the document which were acknowledged by both parties and signed for, it was still necessary to have a cleaned up document which needed fresh signatures. The plaintiff in preparing a cleaned up version of the contract inserted a different tonnage of wheat to be supplied to 2,500 instead of the initial agreed 2000. This being the case, the Counsel for the 1st defendant argued to say that changing of the tonnage from the initial constituted a counter offer to which the client did not consent or accept. In Charlesworth’s Mercantile Law, states that, ‘if the acceptance varies the terms of the offer it is a counter offer and not acceptance of the original offer.’ Therefore, alteration of what is on the offer will entail that the initial offeror will have to accept the included terms as acceptance or rejection.
POSTAL ACCEPTANCE RULE
It is important to elaborate in a nutshell what is involved in the acceptance rule as Muchimba Company Limited hinted in their response to the offer from Buchiclan Investments Limited.
The rule is an exception to the principle that the offeree must communicate acceptance to the offeror. Acceptance takes place when the letter of acceptance is posted, not when it is received. Therefore, it appears that even though Muchimba Company Limited had laid down a condition, yet they implied accepted the offer though counter offered by including different terms. In Adams v Lindsell , the defendant (Lindsell) wrote to the plaintiff (Adams) offering to sell him a quantity of wool and requiring acceptance by post, which the plaintiff provided. A problem arose because the defendant’s original letter to the plaintiff arrived late because it had been incorrectly addressed. The defendant, believing his offer to have been rejected by the plaintiff, sold the wool to another buyer. This took place after the plaintiff’s acceptance had been posted, but before receipt. The court held that the acceptance by the plaintiff was effective on the date of posting, and therefore a binding contract existed between the parties. There are however exceptions to the postal acceptance rule. For the rule to apply, acceptance by post must have been contemplated by the parties like the case in Henthorn v Fraser .The parties had discussed the sale of properties to the plaintiff. The defendant wrote out an offer to sell and handed it to the buyer, who took it away to consider it. A new buyer turned up and a contract was concluded, the defendant writing to the first buyer to withdraw the offer. Before that letter could be received, the plaintiff had through his solicitor written back to accept the first offer. The plaintiff sought specific performance and Lord Herschell ruled by setting out the postal rule in contract situations:
‘Where the circumstances are such that it must have been within the contemplation of the parties that, according to the ordinary usages of mankind, the post might be used as a means of communicating the acceptance of an offer, the acceptance is complete as soon as it is posted.’
The rule may be excluded by the offeror either expressly or impliedly as the case was in Holwell Securities Ltd v Hughes , where an option was ‘exercisable by notice in writing to the intending vendor within six months from the date of the agreement’. The plaintiff sent a written notice within the prescribed time, but it was never received by the defendant. In a subsequent action for specific performance, the court held that the specified requirement for notice in writing to the defendant made the postal acceptance rule inapplicable as the defendant had intimated on the mode of acceptance which was to be a notice in writing.
INTENTION
An intention to be legally bound is the second essential element apart from the offer and acceptance in contract formation. For this reason, a contract hardly comes into existence unless the parties have an intention to enter into a legal relationship and be bound by it legally. Intention may be expressed by the parties or implied by their conduct. According to Stone he wrote in relation to implied intention that, the courts have developed the following rebuttable presumptions:
(a) parties to contracts involving domestic, social and family matters do not intend legal enforceability; In the case of Balfour v Balfour , the husband had agreed to pay his wife monthly support up to the time she rejoined him in Sri Lanka. However, the reunion did not occur hence the husband failed to honour the agreement. The wife then sued for breach of contract but was unsuccessful. The court held that, in the absence of an express intention, the presumption was clearly against enforceability. Their agreement involved matters of a social or domestic nature and there were no facts to rebut the presumption that applies.
(b) parties to contracts involving commercial and business matters do intend legal enforceability. In this case presumption of intention is required as evidenced in Carlill v Carbolic Smoke Ball Co where the court held that the presumption of intention applied despite the defendant’s argument that the advertisement was a ‘mere puff’ or, alternatively, a ‘promise in honour only’. Therefore, analyzing the conduct of both parties in the case, one is left to conclude that Buchiclan Investments Ltd had intended to make the contract legally binding by way of responding in writing as indicated in the letter of acceptance from Muchimba Company Ltd though it bore the wrong address. Nevertheless, what matters is the intention expressed by Buchiclan Investments to make the agreement legally binding.
CONSIDERATION
Consideration is the third essential element of contract formation. However, consideration is only required to form a simple contract as the formal contract is wholly in writing, usually in the form of a deed, and does not require consideration. A promise (or term) of a contract made by deed is called a covenant. A deed can be unilateral (that is, made by only one party) and this is often called a deed poll. A deed made by two or more parties is called an indenture. Some types of contracts must be in writing and must be made by deed to be effective. Simple contract may be oral or in writing (or a combination of both). Simple contracts are made between two or more parties and require consideration. In defining consideration, Sir Frederick Pollock described it as ‘an act of forbearance of one party or the promise thereof, is the price for which the promise of the other is brought and the promise thus given for value is enforceable.’ In other words, consideration is the price paid for the promise of the other party and the price to be paid must be something of value, although it need not be money. Therefore, it may be some right, interest or benefit going to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other party.
As long as consideration of some value exists, the court will not question its adequacy. However, there is an exception rule to this where documents under seal (deeds) do not require consideration for there to be a binding contract.
CONSENT
Entering into contract must involve the elements of free will and proper understanding of what each of the parties is doing. In other words, the consent for each of the parties to a contract must be genuine. Only where the essential element of proper consent has been given is there a contract that is binding upon the parties. The ultimate consequences of establishing that no proper consent was given to enter the contract are matters dealt with when considering remedies for breach of contract.
ADVISE TO MUCHIMBA COMPANY LIMITED
Having analysed the elements in formation of a contract and indeed the case law thereof, it is paramount that Muchimba Company Limited who refuses to take up the delivery of the borehole rigs from the manufacturer is directed through these elements for their easy understanding. To start with, the fact that the company did not object to any of the terms that Buchiclan Investments Limited had submitted on the offer, is a clear indication of implied acceptance. The other aspect to put into contemplation is the fact that, though Muchimba Company Limited had written their response on a letter which did not include the terms as those from the Offeror, which might have acted as a counter offer, Buchiclan responded and posted in time. The action by the offeror was enough to show commitment and intention to a legally binding contract. The contract therefore started upon the offeror posting the letter though on the wrong address making it to arrive late. It also appears that the offeree did not tag time frame as to how long the offeror would be required to take in posting the response. After acceptance, revocation of the offer is inappropriate and this would call for litigation. Though an offer may be revoked at any time, it cannot be brought to an end after acceptance to which the company had already made in writing. This being the case, Muchimba Company Limited will be advised to take the delivery.
CONCLUSION
In an agreement, elements such as offer, acceptance, consideration, intention and consent are vital as they cement the validity of a contract. The acceptance should reflect the offer precisely in order to result in an agreement known as ‘consensus ad idem’. It is clear that a contract that lacks these elements may be considered invalid. However, looking at the case at hand, the postal acceptance rule is the determining factor in the matter.
BIBIOGRAPHY
Applebey, G. (2001). Contract Law. North Yorkshire: Sweet & Maxwell Limited.
Cheshire, Fifoot and Furmston (1986). Law of Contract. 11th Ed. London: Butterworths.
Monahan, G. (2001). Essential Contract Law. 2nd Ed. Sydney: Cavendish Publishing (Australia) Pty Ltd.
Steven and Sons (1977). Charlesworth’s Mercantile Law. 13th Ed. London.
Stone, R. (2002). The Modern Law of Contract. 5th Ed. London: Cavendish Publishing Ltd.
Treitel, G.(1999). The Law of Contract. 10th Ed. London: Sweet & Maxwell.