Formation of a Valid Contract
An agreement is formed between the parties when an offeror (the person who makes an offer) makes an offer to an offeree (the person who receives the offer) and the same is accepted by an offeree. An offer upon being accepted takes the shape of an agreement between the parties. A contract is an agreement which can be enforced through law. But, a contract is formed when there is intention of the parties to be in contract, capacity of the contracting parties and consideration in exchange of promise to be performed. Thus, the various ingredients for the formation of a contract are: (McKendrick & Liu, 2015)
An offer is the intent of an offeror which can be in written or oral form through which he expresses his desire to be in contract with an offeree. The offeror expresses the act of omission which he desires to be undertaken by the offeree (MacRobertson Miller Airline Services v Commissioner of State Taxation, 1975). An offer must be communicated in order to be complete. In case the offer is not communicated to the person for whom it is intended then the same is not said to be complete. An offer can be a general offer, that is, for world at large or for a specific person.
An acceptance is said to occur when an offer made is assented by the offeree. The acceptance must be equal to an offer. If it is different from an offer then it is not considered as a valid acceptance and thus the same is termed as a counter offer, which can be accepted or rejected by an offeror. Acceptance must be clear and must be made prior to revocation of an offer. Acceptance is only complete when the same is communicated to an offeror except in postal rule where the acceptance is concluded upon postage of letter of acceptance (Entores Ltd v Miles Far East Corporation, 1955).
Consideration is the advantage which the performer of the promise gets upon performing the same. Consideration is the motivation towards the performance of promise. Consideration must be present in order to validate a contract. It is a vital ingredient of a contract. It must be sufficient even if it is inadequate (Placer Development Ltd v Commonwealth, 1969).
The parties must have intention to be in legal relation with each other. In case the parties do not intend to bind them legally over a contract then there cannot be a contract. In case of social contracts, it is presumed that the intention is absent unless it is disapproved and in case of commercial transactions the same is presumed to be there till the same is disapproved (Evans v FHCSIA,, 2012).
Oral vs. Written Contracts
The parties to a contract must have capacity to contract i.e. they must have attained age of majority and they should be of sound mind then only they can form part of a valid contract.
All the above ingredients make up a valid contract and if any of the ingredients is absent then the same cannot be termed as a contract rather it is an agreement.
To make a valid contract, there must be offer, acceptance, consideration, intention and capacity, then only a valid contract comes into existence. Only offer and acceptance results in an agreement and not a contract. Hence it can be implied that all the agreements fall within category of contracts but all contracts cannot be termed as agreements. (McKendrick & Liu, 2015)
Agreements and contracts can be made orally or by written mode. Both are valid in law as both have sanctity in law. Oral contracts are on same footing as the written contracts and thus are valid.
Oral contracts are said to be made when a party through its spoken words makes an offer and the same is accepted by other party orally with the presence of other ingredients of the contract. (Australia, 2011)
When the contracts are formulated in writing by the parties on the piece of paper and signing the same then it is termed as a written contract. (Australia, 2011)
However, it is found that written contracts have advantages attached to it which are not found in oral contracts: (McKendrick & Liu, 2015)
- Written contract serves as a piece of evidence in case the same is required to be proved in law.
- The contract is in written form thus the rights and liabilities of the parties in case of deviation can be easily attributed.
- The chances of any misunderstanding between the parties is also quite low as the terms can be easily interpreted and the misunderstanding and doubts can be cleared between the parties.
- The dispute resolution mechanism is also defined in the contract so it makes the resolution convenient as per contract.
- It clarifies to what category a contract belongs and also serves a record between the parties for further and future reference.
- The transfer of property is done by written mode only so as to avoid unnecessary disputes in future.
Thus, certain benefits attached to the written contracts clarify that a written contract is certainly better then an oral contract as it serves as a valid evidence. Thus the dispute resolution in case of written contracts is easy as compared to oral contracts as in oral contracts there is no written record to prove but in case of written contract the same exists.
A formal contract though is in a written form but is different from a written form of contract. A formal contract is valid for a period of twelve years and the same expires only after twelve years. A formal contract is called as formal because there are few formalities which are necessarily to be comply with in order to hold such contract enforceable in law. (Care, 2001)
The basic necessities that are required in the formation of a formal contract are that: (Care, 2001)
- It should be in writing. It is mandatory for a formal contract to be executed in written mode only and it must specify all the terms and conditions as decided between the parties.
- The same must be signed by the parties who are part of the said contract which gives no party an option to deny the contents of the contract executed by them.
- These contracts must be signed as deed and thus if not done so then they are not valid.
- Even if they are not supported by any consideration the same are still valid in the eyes of law.
- The types of formal contracts are:
- CONTRACT OF RECORD – Contract of record are those which are proved in the court of law by the documents which support them. The intention of the parties does not matter in these as they have to be followed by the parties as per the code. A few examples of this are to maintain peace in court, to appear on time in the court.
- CONTRACT UNDER SEAL OR DEED – The contracts under deed must be in writing. They must be signed by the parties to it and the same also must be witnessed properly at least by one witness. They must be executed by adopting the proper procedure.
A contract is established between the parties when there is offer and acceptance along with intention of parties to be in legal relation, consideration and capacity of contracting parties. (McKendrick & Liu, 2015)
Advantages of Written Contracts
In the given case law, the relevant ingredient which needs to be discussed is intention to be in legal relation.
Intention to be in legal relation signifies that the parties have intention to bind themselves and to perform contractual obligation legally as agreed between the parties. In case the intention to be in legal relation is present between the parties then there is a valid contract but if the same is absent then there cannot be a valid contract between the parties and is held in (South Australia v Commonwealth, 1942)
It is found that in case of commercial transactions the intention ingredient is presumed to exist between the parties unless the same is disapproved (Esso Petroleum v Customs & Excise, 1976). Likewise in case of family or social arrangements the intention is presumed to be absent unless the same is established by any party (Darmanin v Cowan , 2010).
The presumption can be disapproved by any of the party to the agreement and the party who rebut the presumption in case of social agreements can prove that there exist a valid contract between the parties and get the social contracts enforced (Snelling v John G Snelling Ltd, 1973). Likewise the presumption in case commercial transaction of existence of contract can be disapproved.
In case the parties share lottery ticket and one of them purchases the same with the funds accumulated by them, then, in such case the prize belongs to all as all were having intention to share the prize as they were sharing the money for purchasing the same and is held in (Simkins v pays , 1955).
The facts submitted that friends contributed money and purchased lottery ticket and after winning, one of the friend who purchased the ticket refused to share the prize by taking plea that the arrangement was social one.
In the instant case the parties contributed money and purchased ticket though it was purchased by one friend does not implies that all other friends contributed under a social relation as all the friends had intention to contribute money and to claim prize. Further the case laws of (Simkins v pays , 1955)is based on the related facts which states that the prize belongs to all as all have shared money under a contractual relation which was commercial in nature. So all have share in the prize also.
All the friends have the claim in prize as they all had contributed under the intention to be in a contractual relation with each other. And only one friend who purchased the ticket cannot claim that the relation was social one as the transaction involved the intention of the parties to be bound by transaction entered between them.
Formal Contracts
In case of agency the principal gets his work done through his agents and thus is liable for the acts of the agents, provided, if the agents perform the acts within the course of their agency and in the scope of agency. In case of agency the acts of the agent are deemed to be the act committed by the principal only and the principal is held liable for such acts of agents. But if the acts of the agent are personal then in such cases the principal cannot be held liable for the acts of their agents (Director of Posts and Telegraphs v Abbott, 1976). The principal is liable for the acts of the agent as the agent works under the control and authority of the principal and for the gain of the principal. The idea behind keeping principal liable is that when the principal earns through the agent than he should also be held liable for the wrongs of the agent. The principal has liability against the third party for the acts of the agent (Hollis v Vabu, 2001). (Gillies, 2004)
In case of independent contractor the contractor himself is liable for the acts performed. If the person is an independent contractor then in such case he acts for him and is thus liable for his own acts. In such cases the acts done by an independent contractor are considered to be his own acts and not the acts of a principal as an independent contractor does not acts under any body’s authority and control so he is liable for the acts committed by him (Derham v AMEV Life Insurance, 1981). (Gillies, 2004)
Conclusion
It is thus concluded that all the contract essentials are must in order to make a valid contract. Also, with the help of these contract essentials written or oral contract can be made but it is found that written contracts are better than oral contract. Also, there are few contracts which require special formalities and are called formal contracts. Lastly, it is found that from the liability point of view the relationship with agent makes the principal liable whereas when the principal is associated with an independent contractor than the liability does not fall upon the principal.
Australia, C. (2011). Australian Master Tax Guide 2011. CCH Australia Limited.
Care, J. C. (2001). Contract Law in the South Pacific. Cavendish Publishing.
Darmanin v Cowan (2010).
Derham v AMEV Life Insurance (1981).
Director of Posts and Telegraphs v Abbott (1976).
Entores Ltd v Miles Far East Corporation (1955).
Esso Petroleum v Customs & Excise (1976).
Evans v FHCSIA, (2012).
Gillies, P. (2004). Business Law. Federation Press.
Hollis v Vabu (2001).
MacRobertson Miller Airline Services v Commissioner of State Taxation (1975).
McKendrick, E., & Liu, Q. (2015). Contract Law: Australian Edition. Palgrave Macmillan.
Placer Development Ltd v Commonwealth (1969).
Simkins v pays (1955).
Snelling v John G Snelling Ltd (1973).
South Australia v Commonwealth (1942).
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