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What is the basis of a contract?

picture of a man writing a contract

A contract is a legally enforceable agreement which usually involves the sale or hire of commodities such as land, goods or services. Most people will make hundreds of contracts every year, often without considering it as many contracts are legally binding without documents, signatures or witnesses. These are known as ‘simple’ or ‘parol’ contracts and can often involve shopping, beauty and hair treatments or using public transport. However, some contracts must be written in order to be valid such as the sale of land, property or contracts to obtain credit. For a contract to exist it must feature an offer followed by acceptance, some consideration and an intention to create legal relations. A contract can be a verbal agreement but this is not always advised as it can be difficult to prove.

An offer must be clear and specific and should include what it is, how much it will cost and sometimes the time period of the offer. For an offer to be binding it will include clearly stated terms, an intention to do business and communication of that intention. An offer is terminated at the end of a specified time limit, death of either party or when a counter-offer is made. Offers must not be confused with an invitation to treat. This is an invitation for others to make an offer. These can be adverts, bids made at an auction or goods in shop windows or shelfs. An offer must also be distinguished from a ‘business puff’. This is an extravagant claim that no right-minded individual would assume to be true (a marketing tool) such as ‘Red Bull gives you wings’.

There are two rules to accepting an offer. First it must be an unconditional agreement to all the terms (a mirror image) and it must be communicated to the offeror. Silence is not acceptance. However, sometimes acceptance can be the performance of an action such as a shop assistant, scanning a product that you offer at the till.

For a contract to be legally binding it must contain some consideration. This has been defined as a benefit to one party or a detriment to the other (something for something). When you purchase a product, your benefit is the product and your detriment is the money you pay and vice versa for the person/business selling the product. A binding contract can be formed by executory or executed consideration. Executory is the exchange of promises to be carried out at a later date such as payment on delivery or payment on completion of a job. Executed consideration is where the consideration has been performed (payment). Past consideration will not usually be sufficient, which is when the promise to pay comes after the promise, such as offering or wanting payment after a job/favour has been completed. The exception to this is where it is proved that services have been rendered, such as, a taxi ride where the consideration is agreed at the end of the service.  Consideration must hold an economic value (money, goods or services) and can not be something like ‘friendship’ or ‘love’. However, it does not have to be seen as adequate, as it is not for the courts to decide whether you got a good deal or not.

Finally, a contract must have the intention to create legal relations. Both parties must have intended for a contract to be formed. Usually in business agreements the courts will presume that both parties intended to form a legally binding agreement. However, in domestic arrangements (friends/families) the courts will presume that both parties did not intend to form a legally binding agreement. In this situation, if the parties did want to rely on an agreement, they must have it evident in writing.

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