Contract Law: An Overview

Components of a Valid Contract

1. Components required for demonstrating that a binding contract exists:

There are 5 components required to demonstrate that a binding contract exists. These elements are important to form a legal relationship in between the parties to the contract. A contract is a voluntary association between two or more people enforceable by law through a binding lawful process. Contractual relationship in between the parties arises due to mutually agreed terms and conditions (Helewitz, 2006).

Offer and Acceptance: In order to form a valid contract there should be a valid offer and acceptance. It is important to make a binding relationship in between the parties. As stated in Carlil vs. Carbolic Smoke ball, an offer is said to be valid if the promisor is serious for carrying the promise based on the terms and conditions (Kramer, 2010).

Intention: the purpose of a contract is to form legal relationship in between the parties. A contract cannot take place without a lawful intention. Gratuitous agreements do not forma legal relationship hence doesn’t come under the purview of contract. In Balfour v Balfour, It was held that there is a rebuttable conjecture adjacent to an intention to create a legally enforceable agreement of domestic nature. Therefore it is mandatory to check the intention of both the parties before forming a contractual relationship (Miller and Jentz, 2009).

Lawful consideration: A valid contract includes a lawful consideration to give a positive effect. A contract without a lawful consideration is not valid. A consideration need to be adequate enough to give an effect to the contract as stated in Chappell & Co Ltd v Nestle Co Ltd(Mulcahy and Tillotson,2004).

Capacity: Both the parties forming a contract should be legally competent enough to form a legal relationship. There are pre-conditions that govern the contract made by the minor, an unsound person or one who is drunk at the time of formation of contract. Any of the party incompetent to form a contract is not a valid contract. A party suffering with mental disorder is not competent to get into a contract as stated in Gibbons v Wright. Such a contract has a right to be ratified (Mulcahy, 2008).

Free consent: A contract should be based on mutual consent between the parties. This is one of the essential parts of a contract. A valid contract should be free from any external force. A contract formed due to any external pressure is invalid in law as stated under Barton v Armstrong.

These components depicts that a valid contract does exist and is enforceable by law. In absence of any one of the component, the contract is invalid (Baker, 2011).

2. No, it is not necessary that a contract should be in writing to check its enforceability. Verbal agreement and oral contract are valid and legally binding as long as they are reasonable, equitable, and conscionable and made in a good faith. The only reason is questionable due to the difficulty in enforcement. Written contract can easily be enforced in the court. They can easily be presented as evidence in court, whereas, it is difficult to dispel the defects in contracts when it is not in writing. It is difficult to prove the facts in the court in absence of a valid contract. Any party to the contract can lie about the terms in the agreement. However there are few contracts that do not required to be written. Implied contracts are the one that does not required being in writing. The transaction is an implicit contract where the goods are sold at a price marked on it (Baskind ET al.2016).

Written or Oral Contract: Which is Legally Binding?

Texaco vs. Pennzoil case

Samuel Goldwyn stated that, “An oral contract is valid as a written contract. Further it was stated that the vast majority of dealings between individuals and people, are, in fact, oral in nature. As per the decided case law the oral contract have the same reciprocation as the written contract and are valid before the court (Bolton and Dewatripont, 2005).

It is recommended to undergo a written contract to surpass the flaws in the verbal contract. It is advisable to “get a contract in writing” to assure both parties recognize their obligations. In case of breach of such contract it is important to gain clarity regarding the act. A written contract can easily be enforced in the court of law. Moreover the parties’ to the contract are aware about their rights and avoid dispute. The breach of contract lawsuits can be expensive to the business, so it is important to get a contract in writing. This will help both the parties to be aware about their individual rights. This will help in ensuring the rights of each and every individual to the contract (Burrows, 2016). A written contract can easily be presented as evidence in court, whereas, it is difficult to dismiss the defects in contracts when it is not in writing. It is difficult to prove the facts in the court in absence of a valid contract

3. A formal contract a legal document signed under seal while an informal contract is the one signed under a seal. The legality of a contract doesn’t rely whether the contract is formal and informal. Both type of contract are valid and can be enforced by the court. A formal contract is one that requires a special for or technique of creation to be enforceable. These contracts uses negotiable instrument to take place such as cheques, promissory notes, bills etc. A formal contract is similar to a valid contract and includes all the basic necessities of a contract. These contracts are mostly carried on daily basis and include the contract formed to ascertain a legal relationship. : Bill of Sale, Purchase Order, Warranty, or Security Agreement are the few example of the formal contract entered by the parties. These are important for a business to create a legal relationship in between the parties and to force effectiveness in an organization (Carter, 2013).

A formal contract is formatted by satisfying all the essentials formalities of a contract. They entail all the necessary points that are important for creating a contract for example:

A valid offer and acceptance
A lawful consideration
Competent parties to the contract
Intention to form a legal relationship
Free consent

For example:

A sales deed in between two parties is said to be a formal contract. A deed includes all the specification and duties that need to be followed by both the parties in order to enforce the deed.
A bill of sales issued by the creditor to the debtor is a formal contract that specifies the total amount of sales and establishes a legal relationship. The bill can be used as evidence in court in case of breach (Charman, 2013).

In the given situation, a group of friends used to get together for a usual drink at a hotel every Friday night. Every individual used to gives $2 towards a group lottery ticket. The lottery was drawn over the weekend by Lotto Company. An individual group was given a duty to buy the syndicate ticket. Whilst, a winning ticket is drawn for the group, and the purchaser of the ticket asserted that it is purely a non- social arrangement whereby he was requested to share the prize.

Formal Contract: Definition and Examples

A social agreement is not intended to be enforced by the court of law. These contracts can be rebutted by the parties involved in it. The contractual relationship only arises when there is money involved and a serious agreement is there. Hence such agreement does not create a legal binding relationship (Clarke, 2014).

The objectives test shows “mutuality” between the parties. This portray that there was an agreement to share any prize money is not correct.

According to both the cases, Trevey v Grubb (1982) 44 ALR 20 and Simkins v pays [1955] 1 WLR 975, one who buy the lottery ticket on behalf of the other group member has to share the winning sum among the entire group member due to the social agreement. In the giving situation all the members in the group are entitled to receive the prize. Trevey v Grubb, By Applying both the cases specially Trevey v Grubb; it is compulsory by the law of contract made under social and domestic agreement to share the prize (Cheeseman and Garvey, 2014).

Conclusion

Social agreements are usually assumed not intended to be enforceable in a court of law. This can be refuted by the situation and by the parties viewing a serious intention. The contractual relationship is said to arise, where money is concerned and when there is a serious agreement, and accountability to deal with money on behalf of the other. There is said to be a contractual relationship that might be in terms of a contractual agreement, creating a legal relations (Collins, 2003).

5. A principal and agent relationship is an arrangement where one entity is legally appointing another to act on its behalf. In such a relationship an agent acts on principal behalf’s. This relationship in between the agent and principal is called as an agency. The law of agencies creates guidelines for such a relationship. These two terms are specified in a contract where the legal transaction in between the parties is build by the agent on behalf of Principal. The principal within the relationship is an individual assign with an opportunity to carry out work. The agent is an individual capable of understanding the task that need to be carried out in order to pursue goal. Common example of a principal and an agent is hiring of a contractor to complete a task related to construction of a house. The principal has given with a responsibility to carry out the responsibility to complete the task (Cross and Miller, 2008). The principal and agent share a fiduciary relationship where both the parties have a responsibility towards each other. The principal is responsible for the act of agent. He has to fulfil all the duties as made compulsory in the contract. He has to work according to the instruction given by the principal to manage the activities accordingly. In addition, the agent has a compulsion to carry out tasks with a certain level of skill and care in order to avoid negligence. A responsibility of faithfulness is also oblique in the principal-agent relationship. This requires an individual to desist from putting himself in a position that makes a conflict between his interests with the principal. The purpose of such an act is to manage the activities in an effective way. The principal and agent relationship is legally binding that affect both the parties to the contract. The principal is responsible for the actions of agent. It creates a legal obligation on principal. It is a prominent proof that Agency is a modern subject in the law. The agent is typically referred to as a servant or a factor, and the factors depend upon the law of Master and Servant. An agent has an obligation to the principal. The principal within the relationship assign with a prospect to carry out work. The agent is an entity able of indulging in the task that need to be carried out in order to pursue goal. He has to fulfil a number of duties which includes: