A legally binding agreement between two or more parties is treated as a contract. As a Quantity Surveyor, it is essential to know critical elements for the formation of a valid contract. Those four crucial elements of a valid contract can be listed as follows.
- there must be an agreement between the parties; and
- the agreement made between the parties must be absolute and final; and
- the parties must intend their agreement to be legally binding; and
- the agreement must either be contained in a deed or be supported by consideration
Types of contracts
Type of contracts can be classified in several ways. But those can be categorised into two main categories,
- Simple and speciality contracts
can be made by,
A contract is formed with a deed is called a speciality contract.
- Bilateral and unilateral contracts
Bilateral contracts arise where the one party (A) makes a promise or several promises to the other party (B), and party (B) in return makes a promise or promises to party (A). It’s called “promise in return for a promise”. Unilateral contract forms where the party (A) makes a promise to B in return for an action to be carried out by B, but B does not promise A to carry out the activity. Its called “promise in return for an action”.
How to form a valid contract with these critical elements
Under the English legal system, a contract is a legally binding agreement between parties which can be formed in below-classified ways.
- Contract, It must be made by deed
- Must be made in writing (but not by deed)
- It must be made with evidence with writing.
Generally, to determine whether an agreement has been made between parties is one of the parties makes a contractual offer to the other party, and the same other party accepts the offer.
4 Key elements to form a valid contract
Below listed are the essentials to create a valid contract.
- Intention to create legal relations
Offer and acceptance are the most significant essentials to form a valid contract. Offer is consist of a firm and definite promise or several promises.
- The party who is making the offer called offeror and,
- the party to whom is made for offer called offeree.
An offer can be made to a particular person, group of persons, to the world at large or to the general public. But the offer is made for whom is entitled to accept it.
Invitation to treat
Importance of the offer is, it must be distinguished from an invitation to treat. An invitation to treat is not a contractual offer because it is just an invitation has made by one party to another party. Display of goods in shops, supermarkets and self-services stores to a customer, is only an invitation to treat.
In this situation, offer is made by the customer and when he made a firm proposal to buy the goods and shopkeeper entitled to accept or refuse the offer.
Case study – Invitation to treat
In the case of “Fisher v Bell (1901)” there was a flick-knife displayed in a shop. It did not constitute an offer to sell. But it is just an invitation to the customer to make an offer. In this case, the shopkeeper is not legally bound to sell goods to the customer at the displayed price. Based on this rule, a display of products in a supermarket or self-service store is an invitation to treat. There is no contractual offer formed.
But in some times advertisement establishes an offer or invitation to treat. It depends on the intention of the advertiser.
As an example case “Carlill v Carbolic Smoke Ball Co (1983)” the manufacturer (defendant) has intended that an advertisement for the treatment of influenza, anyone who caught influenza after using the smoke ball in a specified manner, would pay 100 pounds.
The plaintiff who used the smoke ball according to the specific manner and he caught influenza. The plaintiff claimed 100 pounds from the defendant. Then the Court of Appeal decided that advertisement was an offer.
It is mentioned that the defendant intended to be legally bound by their promises as necessary action was made without further bargaining so that it has formed a contract due to the intention of the advertiser.
As well as an advertisement expressing a willingness to sell goods with the stated price is an invitation to treat.
Example case for that is “Partridge v Crittenden (1968)”. In this case, the defendant made an advertisement stating; “Bramblefinch cocks, Bramblefinch hens, 25 shillings each’. The court was held that I was not an offer but an invitation to treat.
Acceptance of an offer
Next important essential of a valid contract is Acceptance of an offer. It can be defined as a manifestation on the part of the offeree, which he/ she unconditionally agree to the conditions/terms of the offer. In order to respond to an offer to establish a valid acceptance, three main conditions must be fulfilled. Those are,
- the response must be an unqualified assent to the terms of the offer; and
- in general, the response must be communicated to the offeror; and
- The offeree must know of the offer.
Response to an offer forms a valid acceptance if there is no discrepancy between offer and terms of the response to it. Any acceptance by the offeree with a variance to the original terms of the offer will not create a valid acceptance of the offer.
Sometimes such response will automatically terminate the offer. In the situation of a counteroffer by the original offeree to the original offeror which will be entitled to accept or reject.
As an example case of “Hyde v Wrench (1840)” A wrote to B offering to sell his farm for 1000 pounds. B replied to him, saying that he is willing to buy it 950 pounds. A rejected it.
Later B wrote A he is willing to buy it for 1000 pounds. The court was decided that there was no agreement because B’s proposal did not constitute valid acceptance of A’s offer. Moreover, due to B’s proposal to buy 950 pounds terminated the A’s original offer.
The result is A’s original offer was no longer capable of acceptance by B. so that to form valid contract the response to the offer must be unqualified assent to the terms of the offer.
Generally, acceptance is legally bound within the parties when the response must communicate to the offeror.
In the case of “ Entores v Miles Far East Corporation (1955)” the judge was stated that, while the offeree is trying to communicate his acceptance by telephone, the line got disconnected. As a result of that, the offeror does not hear his intended acceptance. Then there is no valid acceptance made. So communication is very vital matter to made contractual acceptance between parties.
As well as in the case of “Tinn v Hoffman (1873)” the offeror needed acceptance by return in post. The court held that acceptance by verbal message or telegram would be effective communication if the offeror comes to know of it not later than the letter by return of post.
Further acceptance is legally valid, if the response not communicated to the offeror, in two situations.
- Postal Acceptance
- Dispensation with the need for communication.
Case study-Postal Acceptance
The case of “Adams v Lindsell (1818)” is an example for the postal acceptance. In this case, the letter of the acceptance was delayed two days due to the transit. Then the offeror sold the wool to a third party before acceptance arrived at him, but after it had been posted. The court held that there was a contract was formed soon after the letter of acceptance was posted.
Other essential to make a valid contract is ‘consideration’. The meaning of the consideration in the contract can be mentioned as “something of value”. As an example A makes a promise to B, which is not supported in a deed, then B can enforce A’s obligation only if B has provided something of value in return for A’s promise.
Consideration can be divided in to bellow mentioned ways.
- Executed consideration
- Executory consideration
- and past consideration
Intention to create legal relation
This is the Last vital elements to make a valid contract between offeror and offeree. It is defined as an ‘intention to form’ a legally binding agreement or contract. This is one of the most necessary elements in the formation of a valid contract.
Because it is an intention to create legal relations consists of readiness of a party to accept the legal sequences of having entered into an agreement. It is a motion of every contracting party must have the necessary intention to enter into a legally binding contract.
Read our next article about FIDIC contracts.