LO1: Understand the essential LO1: Understand the essential

elements of a valid contract in elements of a valid contract in elements of a valid contract in elements of a valid contract in
a Business Context a Business Context
By: Ananta Kar By: Ananta Kar
Email: anantakar@rocketmail.com Email: anantakar@rocketmail.com
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Essential Elements of a valid contract Essential Elements of a valid contract
Essential Essential elements elements:: Offer Offer and and acceptance acceptance;;
intention intention to to create create legal legal relations relations;;
consideration consideration;; capacity capacity;; privity privity of of contract contract
Types Types of of contract contract:: face face to to face face;; written written;; Types Types of of contract contract:: face face to to face face;; written written;;
distance distance selling selling;; impact impact
Types Types of of terms terms:: condition condition;; warranty warranty;;
innominate innominate term term;; express express;; implied implied;; exclusion exclusion
clauses clauses and and their their validity validity
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Outcomes and assessment criteria Outcomes and assessment criteria
Learning outcomes
On successful completion of
this unit a learner will:
Assessment criteria for pass
The learner can:
LO1: Understand the essential
elements of a valid contract
in a business context
1.1 explain the importance of the
essential elements required for the
formation of a valid contract
in a business context
1.2 discuss the impact of different
types of contract
1.3 analyse terms in contracts with
reference to their meaning and
effect
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What is a What is a contract contract
A contract may be defined as an agreement A contract may be defined as an agreement
which legally binds the parties which legally binds the parties
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Essential Elements of a valid contract Essential Elements of a valid contract
Agreement Agreement::
The The first first essential essential feature feature of of aa contract contract is is
that that the the parties parties have have made made an an agreement agreement..
This This usually usually determined determined by by the the rules rules of of
Offe Offer r and and acceptance acceptance.. Offe Offer r and and acceptance acceptance..
Consideration Consideration
The The second second essential essential element element is is the the
agreement, agreement, or or the the obligations obligations assumed assumed by by
each each party, party, must must be be supported supported by by
consideration consideration from from the the other other party party
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Essential Elements of a valid contract Essential Elements of a valid contract continued.. continued..
The The principle principle is is that that the the parties parties to to aa contract contract
must must each each provide provide something, something, whether whether
money, money, the the provision provision of of aa service service or or some some
other other form form of of contribution contribution to to the the contract contract
Intention to create legal relations: Intention to create legal relations:
The last essential element is that the parties The last essential element is that the parties
to the agreement intend that their promises to the agreement intend that their promises
be legally binding be legally binding
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Void Contract Void Contract
An An agreement agreement to to carry carry out out an an illegal illegal act act is is an an
example example of of aa void void contract contract or or void void
agreement agreement..
For For example, example, aa contract contract between between drug drug
dealers dealers and and buyers buyers is is aa void void contract contract simply simply dealers dealers and and buyers buyers is is aa void void contract contract simply simply
because because the the terms terms of of the the contract contract are are illegal illegal..
In In such such aa case, case, neither neither party party can can go go to to court court
to to enforce enforce the the contract contract..
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Validity Factors Validity Factors
Form Form:: Written Written or or Oral Oral
Genuine Genuine Consent Consent:: Misled Misled into into aa contract contract
Capacity Capacity:: Limited Limited capacity capacity to to enter enter into into the the
contract contract ii..e e.. minors minors
Content Content:: Contract Contract must must be be complete complete and and Content Content:: Contract Contract must must be be complete complete and and
precise precise in in its its term term
Legality Legality:: The The courts courts will will not not enforce enforce aa
contract contract which which is is deemed deemed to to be be illelgal illelgal or or
contrary contrary to to public public policy policy
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Privity of Contract Privity of Contract
If you dont provide consideration, you If you dont provide consideration, you
cannot sue on the contract. This is the cannot sue on the contract. This is the
critical rule in contract law, and reflects the critical rule in contract law, and reflects the
fact that consideration is essential fact that consideration is essential
Case Study Case Study- - Page 90 Page 90 Case Study Case Study- - Page 90 Page 90
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Conditions, warranties & Innominate terms Conditions, warranties & Innominate terms
http://www.e http://www.e- -
lawresources.co.uk/Conditions, lawresources.co.uk/Conditions,- -warranties warranties- -
and and- -innominate innominate- -terms.php terms.php
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Thank You Thank You-- 18/12/2013 18/12/2013 Thank You Thank You-- 18/12/2013 18/12/2013
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3. Validity factor 3. Validity factor
33..11 Invalid Invalid contracts contracts
Void Void Contract Contract
The The life life of of aa contract contract
33..22 Form Form of of aa contract contract
It It may may be be written, written, oral oral or or inferred inferred from from
the the conduct conduct of of the the parties parties
Contracts Contracts by by deed deed- - Must Must be be in in writing writing and and
signed signed
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These These contracts contracts must must be be by by deed deed::
Leases Leases for for three three years years or or more more
AA promise promise not not supported supported by by consideration consideration
(example (example- - promise promise to to pay pay aa regular regular sum sum to to aa
charity) charity)
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Contract by deed Contract by deed
AA contract contract by by deed deed is is sometimes sometimes referred referred
to to as as aa speciality speciality contract contract.. Any Any other other type type
of of contract contract may may be be referred referred to to as as aa simple simple
contract contract.. contract contract..
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Contracts which must be in writing Contracts which must be in writing
Written document and usually signed by Written document and usually signed by
at least one of the parties at least one of the parties
A transfer of share in a limited company A transfer of share in a limited company
Consumer credit contracts Consumer credit contracts Consumer credit contracts Consumer credit contracts
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4. Offer 4. Offer
4.1 An offer is a definite promise to be bound 4.1 An offer is a definite promise to be bound
on specific terms on specific terms
Certainty of the offer Certainty of the offer
Case Study discussion Case Study discussion- - Gunthing Gunthing v Lynn 1831 v Lynn 1831
Hillas Hillas & Co Ltd v Arcos Ltd 1932 & Co Ltd v Arcos Ltd 1932 Hillas Hillas & Co Ltd v Arcos Ltd 1932 & Co Ltd v Arcos Ltd 1932
A definite offer may be made to a class of A definite offer may be made to a class of
persons or to the world at a large persons or to the world at a large
Case study Case study- - Carlill Carlill v Carbolic Smoke Ball Co 1893 v Carbolic Smoke Ball Co 1893
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4.2 Supply of Information and Statement of 4.2 Supply of Information and Statement of
Intent Intent
Only the supply in the proper sense may be Only the supply in the proper sense may be
accepted so as to form a binding contract. accepted so as to form a binding contract.
The supply of information will not be The supply of information will not be
considered to be offer. considered to be offer. considered to be offer. considered to be offer.
Case Study Case Study- - Harvey v Harvey v Facey Facey 1893 1893
Case Study Case Study- - Bigg Bigg v Boyd Gibbons 1971 v Boyd Gibbons 1971
A statement of intention A statement of intention
Advertising that an event such as an auction will Advertising that an event such as an auction will
take place is not an offer to sell take place is not an offer to sell
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Thank You Thank You-- 20/12/2013 20/12/2013 Thank You Thank You-- 20/12/2013 20/12/2013
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4.3 An Invitation to treat 4.3 An Invitation to treat
An invitation to treat is an indication that An invitation to treat is an indication that
someone is prepared to receive offers with someone is prepared to receive offers with
the view to forming a binding contract. It the view to forming a binding contract. It
is not an offer in itself is not an offer in itself
There are four types of invitation to treat There are four types of invitation to treat There are four types of invitation to treat There are four types of invitation to treat
Auction sales Auction sales
Advertisements Advertisements
Exhibition of goods for sale Exhibition of goods for sale
An invitation for tenders An invitation for tenders
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Cases and Activities: Cases and Activities:
Advertisements Advertisements- -
Partridge v Crittenden 1968 Partridge v Crittenden 1968- - Page 61 Page 61
Activity 1 Activity 1- - Page 62 Page 62
Exhibition of goods for sale Exhibition of goods for sale Exhibition of goods for sale Exhibition of goods for sale
Fisher v Bell 1961 Fisher v Bell 1961- - Page 62 Page 62
Invitation for tenders Invitation for tenders
A tender is an estimate submitted in response to a prior A tender is an estimate submitted in response to a prior
request. request.
Activity 2 Activity 2
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4.4 Termination of the offer 4.4 Termination of the offer
An offer is terminated so that it may no An offer is terminated so that it may no
longer be accepted in any of the following longer be accepted in any of the following
circumstances circumstances
Rejection Rejection
Lapse of time Lapse of time Lapse of time Lapse of time
Revocation (Cancelled) by the offeror Revocation (Cancelled) by the offeror
Failure of a condition to which the offer was Failure of a condition to which the offer was
subjected subjected
Death of one of the parties Death of one of the parties
Case Study Case Study- - Hyde v Wrench Hyde v Wrench- - Page 63 Page 63
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Counter Counter Offer Offer- - AA counter counter offer offer is is aa final final
rejection rejection of of the the original original offer offer.. If If aa counter counter
offer offer is is made, made, the the original original offeror offeror may may
accept accept it, it, but but if if he he rejects rejects it it his his original original
offer offer is is no no longer longer available available for for the the
acceptance acceptance
Request Request for for Information Information- - It It is is possible possible to to
respond respond to to an an offer offer by by making making aa request request
for for information information
Lapse Lapse of of time time- - An An offer offer may may be be expressed expressed
to to last last for for aa specified specified time time
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Revocation Revocation by by the the Offeror Offeror- - An An offeror offeror may may
cancelled cancelled his his offer offer anytime anytime before before
acceptance acceptance..
Case Case study study- - Routledge Routledge v v Grant Grant 1828 1828- - Page Page 65 65
Failure Failure of of aa condition condition- - AA offer offer may may be be
conditional conditional in in that that it it is is dependant dependant on on some some conditional conditional in in that that it it is is dependant dependant on on some some
event event occurring occurring or or there there being being aa change change of of
circumstances circumstances
Case Case Study Study- - Financings Financings Ltd Ltd v v Stimson Stimson 1962 1962- - Page Page 66 66
Termination Termination by by death death- - The The death death of of the the
offeree offeree terminates terminates the the offer offer
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Acceptance Acceptance
55..11 Definition Definition::
Acceptance Acceptance is is the the unqualified unqualified (unconditional) (unconditional)
agreement agreement to to the the terms terms of of the the offer offer
Case Case Study Study- - Brogden Brogden v v Metropolitan Metropolitan Tailway Tailway Co Co 1877 1877- - Page Page 67 67
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5.2 Acceptance Subject to Contract 5.2 Acceptance Subject to Contract- - Means Means
the offeree is agreeable to the terms of the the offeree is agreeable to the terms of the
offer but proposes that the parties should offer but proposes that the parties should
negotiate a formal contract. Neither party is negotiate a formal contract. Neither party is
bound until the formal contract is signed. bound until the formal contract is signed.
Case Study Case Study- - Branca Branca v v Cobarro Cobarro 1947 1947- - Page 68 Page 68 Case Study Case Study- - Branca Branca v v Cobarro Cobarro 1947 1947- - Page 68 Page 68
55..33 Letter Letter of of Intent Intent- - AA letter letter of of intent intent is is aa
means means by by which which one one party party gives gives aa strong strong
indication indication to to another another that that he he is is likely likely to to
place place aa contract contract with with him him
Case Case Study Study- - British British Steel Steel Corpn Corpn v v Cleveland Cleveland Bridge Bridge and and
Engineering Engineering Co Co Ltd Ltd 1984 1984- - Page Page 68 68
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55..44 Acceptance Acceptance of of tender tender- - An An invitation invitation for for
tenders tenders is is an an invitation invitation to to treat treat.. There There are are
two two types types of of tender tender::
AA tender tender to to perform perform one one task task such such as as building building aa
new new hospital hospital
AA tender tender to to supply supply or or perform perform series series of of things things (It (It is is
aa standing standing offer) offer) aa standing standing offer) offer)
55..55 Counter Counter Offer Offer and and request request for for Information Information
AA counter counter offer offer doesnt doesnt constitute constitute
acceptance acceptance;; it it is is the the making making of of aa new new offer offer
which which may may in in turn turn be be accepted accepted or or rejected rejected..
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55..77 Postal Postal Rule Rule- - The The portal portal rule rule states states that, that,
whether whether the the use use of of the the post post is is within within the the
consideration consideration of of both both the the parties, parties, the the
acceptance acceptance is is complete complete and and effective effective as as soon soon
as as aa letter letter is is posted, posted, even even though though it it may may be be
delayed delayed or or even even lost lost altogether altogether in in the the post post.. delayed delayed or or even even lost lost altogether altogether in in the the post post..
Activity 3 Activity 3- - Discussion Discussion- - Page 69 Page 69
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5.6 Communication for acceptance 5.6 Communication for acceptance- - The The
general rule is that acceptance must be general rule is that acceptance must be
communicated to the offeror and is not communicated to the offeror and is not
effective until this has been done. effective until this has been done.
Waiver (Released) of communication Waiver (Released) of communication- - If the If the Waiver (Released) of communication Waiver (Released) of communication- - If the If the
contract is unilateral contract contract is unilateral contract- - Refer to the Refer to the
Smoke Ball Co. Case study Smoke Ball Co. Case study
Prescribed mode of communication Prescribed mode of communication- - Fax or email Fax or email
or post or post
No mode of communication prescribed No mode of communication prescribed- - You can You can
choose any mode for communication choose any mode for communication
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Thank You Thank You-- 23 Dec 2012 23 Dec 2012 Thank You Thank You-- 23 Dec 2012 23 Dec 2012
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Electronic Contracts Electronic Contracts
In In writing writing- - For For evidence evidence and and think think twice twice
before before entering entering into into the the contract contract
Signed Signed- - Digital Digital signatures signatures
Timing Timing of of acceptance acceptance Timing Timing of of acceptance acceptance
Consideration Consideration- - Difficult Difficult in in credit credit card card
payments payments.. Internet Internet insecurity insecurity
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Chapter Roundup Discussion Chapter Roundup Discussion
Three essential elements of contract Three essential elements of contract
A void contract A void contract
An unenforceable contract An unenforceable contract
An Information to treat An Information to treat- - What are the 4 types What are the 4 types
What is an offer What is an offer What is an offer What is an offer
Termination of an offer Termination of an offer
Acceptance Acceptance- - What is acceptance subject to What is acceptance subject to
contract contract
A counter offer A counter offer
Postal rule Postal rule
Electronic contract Electronic contract
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Chapter 5: Consideration Chapter 5: Consideration
Definition
Privity of
Contract
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Consideration
Waiver of
existing rights
Adequacy and
sufficiency
Chapter 5: Consideration Chapter 5: Consideration Chapter 5: Consideration Chapter 5: Consideration
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Introduction Introduction
Consideration Consideration is is also also one one of of the the three three
essential essential elements elements of of aa binding binding contract contract..
The The principle principle is is that that the the parties parties to to the the
contract contract must must each each provide provide something, something,
whether whether money, money, the the provision provision of of aa service service whether whether money, money, the the provision provision of of aa service service
or or some some other other form form of of contribution contribution to to the the
contract contract..
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1. Consideration 1. Consideration
It It could could be be said said that that one one party party must must know know
that that he he has has bought bought the the other other partys partys
promises promises either either by by performing performing some some act act of of
his his own own or or by by offering offering aa promise promise of of his his
own own.. own own..
Consideration Consideration has has also also been been described described as as
the the price price of of the the other other persons persons promise promise..
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Valid Valid consideration consideration may may be be executed executed or or
executory, executory, but but it it can can not not be be past past
Executed Executed Consideration Consideration:: Is Is performed, performed, or or
executed, executed, act act in in return return for for aa promise promise..
Example Example- - AA offers offers aa reward reward for for the the return return of of
lost lost property, property, his his promise promise becomes becomes binding binding lost lost property, property, his his promise promise becomes becomes binding binding
when when B B performs performs the the act act of of returning returning As As
property property to to him him..
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Executory Executory Consideration Consideration:: Is Is aa promise promise given given
for for aa promise, promise, not not aa performed performed act act..
Example Example- - AA customer customer orders orders goods goods which which aa
shopkeepers shopkeepers undertakes undertakes to to obtain obtain from from the the
manufacturer, manufacturer, the the shopkeepers shopkeepers promises promises to to
supply supply the the goods goods and and the the customer customer promises promises
to to accept accept and and pay pay for for them them.. It It would would be be to to accept accept and and pay pay for for them them.. It It would would be be
breach breach of of contract contract if if either either withdrew withdrew without without
the the consent consent of of the the other other..
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Past Past Consideration Consideration:: Anything Anything which which has has
already already been been done done before before aa promise promise in in
return return is is given given is is past past consideration consideration which, which,
as as aa general general rule, rule, is is not not sufficient sufficient to to make make
the the promise promise binding binding..
Case Case Study Study Discussion Discussion- - Re Re McArdle McArdle 1951 1951- - Page Page 81 81
If If there there is is an an existing existing contract contract and and one one party party
makes makes aa further further promise, promise, no no contract contract will will arise arise
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Activity 1: Page No 83 Activity 1: Page No 83
Which Which of of the the following following is is valid valid consideration? consideration?
Try Try to to state state the the law law to to justify justify your your answer answer..
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2. Adequacy and sufficiency of consideration 2. Adequacy and sufficiency of consideration
The The law law says says consideration consideration need need not not to to be be
adequate adequate but but it it must must be be sufficient sufficient
This This means means consideration consideration need need not not to to be be
equal equal value value to to the the parties parties to to the the contract, contract,
but but it it must must be be of of some some value value to to the the parties parties but but it it must must be be of of some some value value to to the the parties parties
involved involved
In In basic basic contract contract for for the the sale sale of of goods, goods, one one
party party will will provide provide money money as as his his
consideration, consideration, and and the the other other party party will will
provides provides the the goods goods..
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Adequacy Adequacy:: The The court court has has already already made made it it clear clear that that
parties parties to to aa contract contract are are expected expected to to look look after after
themselves, themselves, and and the the court court will will not not protect protect them them if if
all all they they have have done done is is made made aa bad bad bargain bargain and and
accepted accepted inadequate inadequate consideration consideration..
Sufficiency Sufficiency (In (In context context to to existing existing contract) contract):: If If Sufficiency Sufficiency (In (In context context to to existing existing contract) contract):: If If
there there is is already already aa contract contract between between AA and and B, B, and and B B
promises promises additional additional reward reward to to AA if if he he (A) (A) will will
perform perform his his existing existing duties, duties, there there is is no no
consideration consideration from from AA to to make make that that promise promise binding binding..
AA assume assume no no extra extra obligation obligation and and B B obtains obtains no no
extra extra rights rights or or benefits benefits
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Activity 2: Which of the following is Activity 2: Which of the following is Activity 2: Which of the following is Activity 2: Which of the following is
true of consideration? true of consideration?-- Page 87 Page 87
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3. Privity of contract 3. Privity of contract
Privity Privity of of contract contract is is the the relation relation between between
the the two two parties parties to to aa contract contract.. Third Third parties parties
who who are are not not privy privy to to the the contract contract generally generally
have have no no right right of of action action.. This This is is true true even even if if have have no no right right of of action action.. This This is is true true even even if if
they they receive receive benefits benefits under under it it..
Case Case Study Study discussion discussion- - Tweddle Tweddle v v Atkinson Atkinson 1861 1861
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Thank you Thank you-- 25/12/2013 25/12/2013 Thank you Thank you-- 25/12/2013 25/12/2013
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