“TO CREATE A CONTRACT THERE MUST BE A COMMON INTENTION OF THE PARTIES TO INTER INTO LEGAL OBLIGATION” -EXPLAIN & ILLUSTRATE

2011

TOPIC:

IT IS A SETTLED PRINCIPLE IN ENGLISH LAW THAT

“TO CREATE A CONTRACT THERE MUST BE A COMMON INTENTION OF THE PARTIES TO INTER INTO LEGAL OBLIGATION”

-EXPLAIN & ILLUSTRATE

Table of Contents

Topic Page No

Objectives of the Study                              ———————————01

Research methodology                              ——————————— 01

Limitation ———————————01

(01)      Introduction                                           ——————————— 02

(02) Sources of Contract Law                         ———————————03

(03)      Contract                                                      —————————–04-05

(04)      Essential Elements of a Valid Contract —————————-05-07

(05)     Void Contract                                             ———————————07

(06)     Validity of a Contract                             —————————–07-08

(07)   Presumption                                                 —————————–08-09

(08)   Major Areas of a Contract              ———————————09

(09) Cancellation of Contract                              ———————————09

(10) Conclusion                                                  ———————————-10

Bibliography ———————————-11

OBJECTIVES OF THE STUDY:

This report has been created for the academic requirement of the assignment. The objectives of the study are

  • Clear knowledge about Contract law.
  • Find out the relationship between contract and their obligation.
  • Get knowledge how a contract form, major principles etc.

RESEARCH METHODOLOGY:

Internet is the most popular medium of data collection now-a-days. I have collected data related to the assignment topic from the internet and various News Papers as well. The study covers time period from 7th May 2011 to 18th June 2011. Data are collected from various published of, journal, and Website. I also use many Law related books for prepare this assignment. I have collected information from different articles and analyzed these.

LIMITATION:

So in performing this assignment my lack of proper knowledge greatly influenced in this performance. Besides above have to face some other limitations are:

  1. Being busy is a reason of not giving more information.
  2. Another crucial limitation is that I have not found enough secondary data.
  3. This sort of assignment is hard to be conducted within short period of time. I had to overcome various barriers during very short time.

1. INTRODUCTION:

Contract comes from Latin “contructus” mean “to work on contract”[1]. Contract law is based on the principle expressed in the Latin phrase “pacta sunt servanda”, which is usually translated agreements to be kept but more literally means pacts must be kept[2]. Contract agreeing on specific matters weather those are national or international aspect of agreements or not, in a broad sense[3], contract is in agreement between two or more competent parties in which an offer is made and accepted, and each party benefits[4]. Some contracts are required to be in writing in order to be enforced. Example of a contract is a lease, a promissory note, or a rental agreement. According to legal scholar Sir John William Salmoned, a contract is “an agreement creating and defining the obligations two or more parties”[5]. So a contract consists of three ingredients: an agreement, a consideration, an intention to create a legal relationship[6].

However, this assignment mainly concerns “To create a contract there must be a common intention of the parties to enter into legal obligations”, mutually communicated expressly or impliedly[7]. It is open for the parties to use express language to indicate intent to impose legal obligations on each other. Alternatively, this intention can be impliedly from the circumstances[8]. The courts use an objective test in making a determination about the intention of the parties. In making an objective determination of the parties, intention the court looks at the surrounding circumstances and asks if a reasonable person would regard the agreement as intended to be binding. Such jurisdictions usually retain a high degree of freedom of contract, with parties largely at liberty to set their own terms. This is in contrast to the civil law, which typically applies certain overarching principles to disputes arising out of contract, as in the French Civil Code.

2. SOURCES OF CONTRACT LAW:

This law derived from previous decisions on cases of similar merits, known as Judge made law. Contract Law is based on Common Law[9]. To be legally enforceable the agreement must comply with common Law requirements for a valid contract Statute Law enacted by parliament and ensure that law will reflect the needs of the community Contract Law has been affected by statute law.

All agreement are contract if there are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void[10].

Obligation of parties to contracts- The parties to a contract must enter perform, or offer to perform, their respective promises, unless such performances is dispensed with or excused under the provision or of any other law[11].

Promises bind the representative of the promises in case of the death of such promises before performance, unless a contrary intention appears from the contract.

Illustration: A promises to paint a picture for B by a certain day, at a certain price. A died before a day. The contract cannot be enforced either by A’s representatives or by B.

The contract does not say anything about the place where the contract is and it is no part of the ordinary law of contract. Law applicable where parties belong to different countries, where the parties have expressed their indentation that the contract was to be governed by law, it is not possible to accept that the law of the place of performance of the contract lex loci solution is to be deemed to the proper law of contract governing by the substance of the obligation.

3. CONTRACT:

A contract is a legally binding agreement or relationship that exists between two or more parties to do or abstain from performing certain acts. A contract can also be defined as a legally binding exchange of promises between two or more parties that the law will enforce. For a contract to be formed an offer made must backed acceptance of which there must be consideration. Both parties involved must intend to create legal relation on a lawful matter which must be entered into freely and should be possible to perform.

Some writers say that a specific intention to create legal relations is not necessary, and that the absence of consideration would be sufficient to deal with this[12]. This is much the same point as we will make in our discussion of promissory estoppels. Here one could say that if you wanted to know whether a person intended to create legal relations, you could look to see what they had done or promised to do as their part of the arrangement.

However, the question of intention is something which is looked at in addition to the aspect of consideration. There are sometimes good reasons why parties would like to see their relationships as non-legal. Another dimension of the theoretical debate in contract is its place within, and relationship to a wider law of obligations. Obligations have traditionally been divided into contracts, which are voluntarily undertaken and owed to a specific person or persons, and obligations in tort which are based on the wrongful infliction of harm to certain protected interests, primarily imposed by the law, and typically owed to a wider class of persons[13].

Example: The case of Balfour v Balfour provides an example of the operation of the presumption that agreements between married couples are not intended to render the parties as legally bound to perform the contract[14]. It was held in this case that as Mr. and Mrs. Balfour had failed to expressly declare their intention for their agreement to be legally binding, Mrs. Balfour could not recover payments that she felt were owed to her by her husband under their arrangement. The courts saw this case as one involving domestic matters, recognizing that ‘the common law does not regulate the form of agreements between spouses.’ The case is often cited in conjunction with Merritt v. Merritt[15]. Here the court distinguished the case from Balfour v. Balfour because Mr. and Mrs. Merritt, although married again, were estranged at the time the agreement was made. Therefore any agreement between them was made with the intention to create legal relations. So a contract is a legally binding agreement or relationship that exists between two or more parties to do or abstain from performing certain acts.

4. ESSENTIAL ELEMENTS OF A VALID CONTRACT:

A contract therefore, is an agreement the object of which is to create a legal obligation i.e., a duty enforceable by law. “An agreement enforceable by law is a contract[16].” To be enforceable by law, an agreement must possess the essential elements of a valid contract as contained in sections 10, 29 and 56. According to section 10, all agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration, with a lawful object, are not expressly declared by the Act to be void, and where necessary, satisfy the requirements of any law as to writing or attention or registration. As the details of these essentials form the subject matter of our subsequent chapters, we propose to discuss them in brief here. The essential elements of a valid contract are[17].

a. Offer and acceptance: There must a ‘lawful offer’ and a ‘lawful acceptance‘ of the offer, thus resulting in an agreement.[18]

b. Intention to create legal relations: There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations.

c. Lawful consideration: The third essential element of a valid contract is the presence of ‘consideration’.[19]

d. Capacity of parties: The parties to an agreement must be competent to contract. But the question that arises now is that what parties are competent and what are not. The contracting parties must be of the age of majority and of sound mind and must not be disqualified by any law to which they are subject[20].

e. Free consent: Free consent of all the parties to an agreement is another essential element. ‘Consent’ means that the parties must have agreed upon the same thing in the same sense[21].

f. Lawful object: For the formation of a valid contract it is also necessary that the parties to an agreement must agree for a lawful object[22].

g. Writing and registration: According to the Indian contract Act, a contract to be valid, must be in writing and registered.

h. Certainty: “Agreements, the meaning of which is not certain or capable of being made certain, are void.[23]” In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain.

i. Possibility of performance: Yet another essential feature of a valid contract is that it must be capable of performance. “An agreement to do an act impossible in itself is void”[24].

j. Not expressly declared void: The agreement must not have been expressly declared to be void[25], specify certain types of agreements that have been expressly declared to be void.

From the above elements, we find that a contract essentially consists of two elements: (1) An agreement and (2) Legal obligation i.e., a duty enforceable by law.

1. Agreement: As per section 2 (e): “Every promise and every set of promises, forming the consideration for each other, is an agreement.” Thus it is clear from this definition that a ‘promise’ is an agreement. What is a ‘promise’? The answer to this question is contained in section 2 (b) which defines the term.” When the person to whom the proposal is made signifies his assent thereto the proposal is said to be accepted. A proposal, when accepted, becomes a promise.”

2. Legal obligation: As stated above, an agreement to become a contract must give rise to a legal obligation i.e., a duty enforceable by law. If an agreement is incapable of creating a duty enforceable by law. It is not a contract.

Recently it has been accepted that there is a third category, restitution obligations, based on the unjust enrichment of the defendant at the plaintiff’s expense[26]. Contractual liability, reflecting the constitutive function of contract, is generally for failing to make things better[27], liability in tort is generally for action[28] making things worse, and liability in restitution is for unjustly taking or retaining the benefit of the plaintiff’s money or work.

5. VOID CONTRACT:

a. Definition

A void contract is one which has no legal effect whatsoever owing to the fact that a transaction which is void is without any legal effect, it I a misuse of terms to call transaction a void contract.

For an example, a storekeeper agrees to purchases stolen goods. The thief has no recourses at law because the agreement to purchase the goods was void as it assisted a thief to get the benefit or his crime.

b. Void and illegal contracts distinguished:

A voidable contract takes its full and proper legal effect until it is set aside, while a void contract is a nullity and no right would accrue there under from its commencement[29]. A void contract is one which has no legal effect. An illegal contract, like the void contract has no legal effect as between the immediate parties, but has this further effect that transactions collateral become tainted with legality and become enforceable.

Wagering Contract: in Bombay presidency wagering contract are unlawful by statute, and taint collateral transactions rendering themes void. In the rest if India wagering contract are only void, and thus collateral contract are not affected.

6. VALIDITY OF A CONTRACT

Every agreement and promise enforceable by law is a contract. As note above, an agreement enforceable by law is a contract. All such agreement which satisfy the conditioned mentioned in section 10 of Indian contract act. Section 10 is as under- “All agreement is contract if there are made by free consent of partiers competent to contract for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void”.

For the validity of contract section 10 requires the following essential to satisfy[30].

1-      There should be and agreement between two parties, an agreement arises when    on party makes a proposal or present and the other parties accept the offer.

2-           The parties to the agreement should be proficient to contract.

3-           There should be lawful deliberation and object in respect of the agreement.

4-           There should be consent of the parties, when they enter in to agreement.

5-           The agreement must not be one, which has been declared to be void.

7. PRESUMPTION

One of the fundamental principles of contract law is that parties to a contract must have an intention to be legally bound[31]. There is a presumption that social, domestic or family agreements are not legally binding as individuals make promises to each other on a regular basis that they would not intend to have legal effect. If parties who are in a familial relationship are contracting in a business context or if a husband and wife enter into an agreement in circumstances in which they are no longer living in harmony. Similarly, if the words used in the contract indicate a legal intention, the presumption that may otherwise have arisen may be rebutted.

A further presumption revolves around the idea that in commercial agreements, it is thought that such intention exists. It is clear that the parties may rebut but it is difficult to prove to the courts that a commercial agreement was not intended to have legal effect. There is a presumption for commercial agreements that parties intend to be legally bound[32]. On the other hand, many kinds of domestic and social agreements are unenforceable on the basis of public policy, for instance between children and parents. The presumption is that domestic and social agreements are not intended to have legal force[33].

Family, Social and Domestic Agreements: Presumption held that such family, social and domestic agreements held not binding. It is held that close relatives do not usually intend on various arrangements which they make to create legal relations and that they prefer to rely on “family ties of mutual trust and affection”

Commercial Agreements: In commercial agreements the presumption is that parties did intend to be legally bound. In commercial agreements it is rare to conclude that parties did not intend their agreement to be attended by legal consequences. For commercial arrangements, the opposite assumption applies. In commercial dealings it is extremely difficult to evade the obligations of an agreement by claiming that it was never intended to be legally binding[34]. To create this effect, the wording of the agreement must be very clear.[35]

Honour clauses: The “Honour clauses” declares that an agreement is not to be legally binding, with the result that the agreement is “binding in honour only”. They might be used where the parties are prepared to rely on non-legal sanctions[36].
Promotional Puff: The extravagant, non-specific language of the advertiser may fail to satisfy the criteria of a representation of fact. Such language may also fail as the basis itself of contractual obligation for the reason that this was not intended.
Letter of Comfort: Letters of comfort must contain statements of a promissory nature if they are to evidence an intention to create legal relations

8. MAJOR AREAS OF A CONTRACT:

Their are some major areas within every contract this are[37] Parties, Effective Date and Terms, Statement of Service (SOS), Pricing, Performance Standards, Warranties, Remedies, Risk Allocation, Boilerplate, Signatures.

9. CANCELLATION OF CONTRACT:

A party to a contract is not entitled in a law to cancel a concluded contract unilaterally. Having entered into an agreement, it is open to the defendant to resale from the same on untenable ground as he pleases. Therefore, such a cancellation has no effect in law. Similarly unilateral addition to terms is not permissible[38].

10. CONCLUSION:

A fundamental principle of Contract law is that the contracting parties must actively intend to enter into an arrangement that creates legal obligations. For common-sense reasons, domestic arrangements are assumed not to create a contract, while commercial arrangements are assumed to create one, unless clearly specified. The law of contract restricts itself to voluntarily created civil obligation. It is not even the whole law of civil obligation. Civil obligations created by the tort or trust law are outside the field of contract because they are not necessary voluntary choices.

“To create a contract there must be a common intention of the parties to enter into legal obligations, mutually communicated expressly or impliedly”. This intention may be found to be expressed or implied through an analysis of the subject matter of the contract, or the conduct of the parties. The parties must have intended to create a legal relationship, Intend that their agreement should be attended by legal consequences.

Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations, along with tort, unjust enrichment, and restitution. As a means of economic ordering, contract relies on the notion of consensual exchange and has been extensively discussed in broader economic, sociological, and anthropological terms. In American English, the term extends beyond the legal meaning to encompass a broader category of agreements.

Since the contract is a legally binding agreement with the intention to give rise to legal rights and obligations.

– The intention brings the wills of party’s together.
– Meeting of the minds
– The court will look at: – Writing – Spoken Words – Behaviors
– The relevant intention may be expressed or implied.

The intention of the parties has to be gathered not only from the words used in the contract by the parties but also from the circumstances, their belief, knowledge and intention as expressed in their correspondences.

BIBLIOGRAPHY:

ü      The American Journal of International Law: Hans Wehberg.

ü      Mohammad Haider Ali, A textbook on law of contract by, 1st Edition.

ü      Principle of Sanctity of contracts: byTrans-Lex.org.

ü      Contract Law Homepage: Dr Robert N Moles.

ü      Business Law: CIMA.

ü      Handbook of Commercial Law: A.K.Sen.

ü      The Law Of Contracts: Noshirvan H.Jhabvala

ü      The Indiana Contract Act: Mullah

ü      Contract Law: Mc Kendrick E.

ü      Beatson, Anson’s Law of Contract

ü      The contract act 1872

ü      Indian Contract Act.

ü      www.webmaster.com

ü      www.LSBF.org.uk/LLM

ü      www.answers.com

ü      www.oppapers.com

ü      www.wikipedia.org

ü      www.economic-truth.co.uk

ü      www.wikipedia.org.

ü      www.lectlaw.com

ü      www.helium.com

ü      www.lawiki.org

ü      Balfour v. Balfour

ü      Merritt v. Merritt

ü      Atkin LJ in Rose & Frank Co v JR Crompton & Bros Ltd.

ü      2008 Merriam-Webster online dictionary

[1] Mohammad Haider Ali, A textbook on law of contract by, 1st Edition, page#04, para#2nd

[2] ^ Hans Wehberg, Pacta Sunt Servanda, The American Journal of International Law, Vol. 53, No. 4 (Oct., 1959), p.775.; Trans-Lex.org Principle of Sanctity of contracts

[3] ^ 2008 Merriam-Webster online dictionary

[4] ^ http://www.lectlaw.com/def/c123.htm

[5] ^ http://en.wikipedia.org/wiki/contract

[6] ^ www.economic-truth.co.uk

[7] ^ Rose and Frank Co v JR Crompton & Bros Ltd

[8] ^ https://www.oppapers.com

[9] The Law Of Contracts, Noshirvan H.Jhabvala, page#14

[10] Mohammad Haider Ali, A textbook on law of contract by, 1st Edition, page#33, para#4

[11] The contract act 1872, Sec 37

[12] ^ www.LSBF.org.uk/LLM

[13] ^ Dr Robert N Moles, “Contract Law Homepage”, A state of Injustice – table of contents, Losing Their Grip – The Case of Henry Keogh – table of contents

[14] ^ Balfour v. Balfour [1919] 2 KB 571

[15] ^ Merritt v. Merritt [1970] 2 All ER 760; [1970] 1 WLR 1211; CA

[16] ^ Section 2(h) of the Indian Contract Act:

[17] ^ www.answers.com

[18] The adjective ‘lawful’ implies that the offer and acceptance must satisfy the requirements of the contract act in relation thereto.

[19] Consideration has been defined as the price paid by one party for the promise of the other.

[20] ^ Act. Section 11 of the contract Act

[21] ^ Act. Section 13 of the contract Act

[22] The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must mot imply injury to the person or the other of the reasons mentioned above the agreement is void.

[23] ^ Act. Section 29 of the contract Act

[24] ^ Act. Section 56 of the contract Act

[25] ^ Act. Section 24-30 of the contract Act

[26] ^ Beatson, Anson’s Law of Contract (1998) 27th ed. OUP, p.21

[27] not rendering the expected performance.

[28] opposed to omission

[29] Mohammad Haider Ali, A textbook on law of contract by, 1st Edition, page#09, para#2

[30] ^ http:// www.citehr.com/200242-difference-betwen-agreement-contract.htm#axzz17HIJrzRn

[31] ^ www.helium.com, Created on: August 21, 2007

[32] unless the parties expressly state that they do not want to be bound, like in heads of agreement

[33] ^  www.webmaster.com

[34] ^ Edwards vskyways ltd 1964, Esso vcustoms and excise commissioners 1976

[35] ^ “http://lawiki.org/lawwiki/Intention_to_enter_into_a_legally_binding_agreement“, (see: Rose and frank co vcrompton,1925

[36] such as their ongoing commercial dealings with each other, as an inducement to perform.

[37] ^ contract components

[38] PLD 1976 Karachi 14. PLJ 1976 Kar 58 (DB)