Introduction:
A contract is an agreement, enforceable by law where every promise and every set of promises, forming the consideration for each other, is an agreement. According to Salmond “a contract is an agreement creating and defining obligations between the parties”. According to Sir William Anson, “A contract is-an agreement enforceable at law made between two or more persons, by whom rights are acquired by one or more to acts or forbearances on the part of the other or others”. A contract intends to formalize an agreement between two or more parties, in relation to a particular subject. Contracts can cover an extremely broad range of matters, including the sale of goods or real property, the terms of employment or of an independent contractor relationship, the settlement of a dispute, and ownership of intellectual property developed as part of a work for hire. In a contract there must be an agreement and the agreement must be enforceable by law.
The first step in a contract question is always to make sure that a contract actually exists. There are certain elements that must be present for a legally binding contract to be in place.
The first two are the most obvious:
An offer: An expression of willingness to contract on a specific set of terms, made by the offer or with the intention that, if the offer is accepted, he or she will be bound by a contract.
Acceptance: An expression of absolute and unconditional agreement to all the terms set out in the offer. It can be oral or written. The acceptance must exactly mirror the original offer made.
Counter-offer: A counter-offer is not the same as an acceptance. A counter-offer extinguishes the original offer. The offeree can’t make a counter-offer and then decide to accept the original offer. But a request for information is not a counter-offer. If the offeree asks the offeror for information or clarification about the offer, that doesn’t extinguish the offer; the offree is still has the rights to accept the offer if he does want.
It is very important to distinguish an offer from an “invitation to treat[1]” that is, an invitation for other people to submit offers. Some everyday situations which we might think are offers are in fact invitations to treat. For example, in a store a Hugo Boss perfume is displayed and showing its price BDT 4,500 on a shelf. It doesn’t mean that, the perfume is placed in a shop is a offer made by the owner of the shop rather it has made an invitation to treat. When the customer will pick up that book and take it to the checkout, the customer makes the offer to buy the perfume for BDT 4,500. When the sales person at the cashbox takes the money, the shop accepts the offer, and a contract comes into being. Advertisements basically work in the same way as the scenario above. Advertising something is like inviting the customer to offer the product[2].
In terms of auctions the original advertising of the auction is just an invitation to treat. When the bidder makes a bid, he makes an offer. When the hammer falls, the winning ‘offer’ has been accepted. The offeree now has a legally binding contract with the winning bidder so long as there is no reserve price that hasn’t been reached[3].
Typically, in order to be enforceable, a contract must involve the following elements:
A Mutual Consent:
The parties of the contract must have a mutual understanding of what the contract covers. For example, in a contract for a “smart phone”, the buyer thinks he will obtain an iPhone 4 and the seller also believes he is contracting to sell the same thing according to the buyers demand, then there is a contract is going to held on. But, if the buyer thinks he will obtain an iphone 4 and the seller believes he is contracting to sell a Samsung Galaxy SII, there is no meeting of the minds and the contract will likely be held unenforceable.
Offer and Acceptance:
The contract involves an offer to an offeree, who accepts the offer. For example, in a contract for the sale of a Lancer EXi, the offeror may offer the car to the offeree at BDT 30lac. The offeree’s acceptance of that offer is a necessary part of creating a binding contract for the sale of the car.
But, if any kind of counter-offer is not an acceptance, and will typically be treated as a rejection of the offer. For example, if the offeree counter-offers to purchase the car for BDT 28lac, that typically counts as a rejection of the original offer for sale. If the offerer accepts the counter-offer, a contract may be completed. However, if the offerer rejects the counter-offer, the offeree will not ordinarily be entitled to enforce the prior BDT 28lac price if the offerer decides either to raise the price or to sell the car to somebody else.
Lawful Consideration:
“A consideration is some right, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.”[4] “A consideration is an act or forbearance of one party or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.”[5]
In order to be valid, the parties to a contract must exchange something of value. In the case of the sale of a car, the offeree receives something of value in the form of the car, and the offeror receives money in return. While the validity of consideration may be subject to attack on the basis that it is illusory[6] or that there is a failure of consideration[7], these defenses will not let a party to a contract escape the consequences of bad negotiation. For example, if a offeror enters into a contract to sell a Lancer EXi for BDT 20lac, and later gets an offer from somebody else for taka 30lac, the offeror can’t revoke the contract on the basis that the car was worth a lot more than he bargained to receive[8]. There are four legal maxims that apply to consideration:
- Consideration must move from the promisor[9].
- Consideration need not move to the promisee6.
- Past consideration is not good consideration.
The consideration given must be sufficient, but it need not be adequate.
Performance or Delivery:
In order to be enforceable, the action anticipated by the contract must be completed. For example, if the offeree pays the BDT 30lac purchase price, he can enforce the contract to require the delivery of the car. But, unless the contract provides that delivery will occur before payment, the offeree may not be able to enforce the contract if he does not perform by paying the BDT 30lac. Similarly, again depending upon the contract terms, the offeror may not be able to enforce the contract without first delivering the car. In a typical “breach of contract” action, the party claiming the breach will declaim that it performed all of its duties under the contract, whereas the other party failed to perform its duties or obligations.
Additionally, the following elements may factor into the enforceability of any contract:
Good Faith
It is implicit within all contracts that the parties are acting in good faith. For example, if the seller of the Galaxy SII knows that the buyer thinks he is purchasing a mobile iPhone, but secretly intends to sell the buyer a Galaxy SII, the seller is not acting in good faith and the contract will not be enforceable.
No Violation of Public Policy
In order to be enforceable, a contract cannot violate public policy[10]. But, the public policy can be shifted. Traditionally, many states refused to honor gambling debts incurred in other jurisdictions on public policy grounds. However, as more and more states have permitted gambling within their own borders, that policy has mostly been abandoned and gambling debts from legal enterprises are now typically enforceable.
Oral Contracts
It can be very difficult to prove that an oral contract exists[11]. Absent proof of the terms of the contract, a party may be unable to enforce the contract or may be forced to settle for less than the original bargain. Thus, even when there is not an opportunity to draft up a formal contract, it is good practice to always make some sort of writing, signed by both parties, to memorialize the key terms of an agreement. At the same time, under most circumstances, if the terms of an oral contract can be proved or are admitted by the other party, an oral contract is every bit as enforceable as one that is in writing. There are, however, “statute of fraud” laws which hold that some contracts cannot be enforced unless reduced to writing and signed by both parties.
Types of contract:
There are basically three types of contracts.
- Express Contract
- Implied Contract
- Quasi Contract
Express Contract:
Express Contract[12] is a contract in which the agreement of the parties has been expressed in words, either in oral or written form. An exchange of promises in which the terms by which the parties agree to be bound are declared either orally or in writing, or a combination of both, at the time it is made. Whether oral or written, the contract must manifest a mutual intent to be bound expressed in a manner capable of being understood, and include a definite offer, unconditional acceptance and consideration.
An express contract is differs from implied contract only in the mode of establishing assent and the mode of proof required; the distinction involves no difference in legal effect. Both forms of contract require mutual assent and a meeting of the minds, but an express contract is proved by an actual agreement where an implied contract in fact is proved by circumstances and the conduct of the parties. An acceptable alternative way of describing an express contract is; a contract in which the terms have been agreed upon either orally or in writing.
For example, the landlord presents the tenant with a preprinted lease on the apartment and the tenant wants and agrees to the terms and signs it. This is an express, written contract.
Implied Contract:
An Implied Contract[13] is a contract where the agreement of the parties is indicated by their conduct. Acceptable alternative ways of describing an implied contract are; a contract in which the performance of the parties infers agreement. The parties indicate their agreement to a contract by their actions, rather than by making a promise.
For example, a transporter regularly ships a garment owner’s goods and there is no written contract between them but it acts like a written agreement.
Quasi Contract:
A quasi contract is an obligation that is imposed by the courts to avoid injustice or unjust enrichment. Acceptable alternative way of describing a quasi-contract is, an implied-in-law contract imposed by the courts to prevent injustice. We can also say that, a quasi-contract is a special form of contract that lacks mutual assent of the parties but which is imposed on the parties by the courts to avoid injustice[14]. For example, a supplier supplies to the buyer bad goods and the buyer refuses to pay as there is no contract exists. Therefore, the supplier goes to the court and claims for his payment. Then the verdict of the court allows the buyer to pay the supplier. This is an example of Quasi Contract.
Statute of Frauds:
A “statute of frauds” requires that certain contracts be in writing, and that they be signed by all parties to be bound by the contract. Although there can be significant variation between jurisdictions, the most common types of contracts to which a statute of fraud applies are:
- Contracts involving the sale or transfer of land
- Contracts to answer for the debt or duty of another
- Contracts that, by its terms, cannot be completed within one year[15]
- Certain contracts for the sale of goods, under the Uniform Commercial Code[16]
Typically, to satisfy the requirements of the statute, the writing must identify the contracting parties, recite the subject matter of the contract such that it can reasonably be identified, and present the essential terms and conditions of the parties’ agreement. Even without respect to the Statute of Frauds, it is good practice to reduce the essential terms of any contract to a signed, written agreement. Even when a Statute of Frauds does not apply to an oral contract[17], it may be very difficult to prove and enforce the contract in the absence of a written agreement.
Conclusion:
From the above explanation we can easily conclude that, in a contract willingness of the all parties is required. Otherwise it will not be considered as any contract. To make a contract an offeror should place any offer to an offeree and the offeree willingly has to accept the offer. In the contract there should be a mutual consent between the parties otherwise the contract will not be a valid contract. Also it should be a lawful contract or the contract must not be contradictory with the state or region law. If the contract is not lawful then it will void the contract. The contract can be in any form, formal or casual, written or oral but must be regular and with a set of certain regular activities. Therefore, we can easily conclude with the statement that, a contract is a legal relationship between two or more people or parties who accept or refrain from doing certain act.
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[1] Invitation to treat looks like an offer but actually is not like an offer rather inviting or inspiring the offeror to make an offer.
[2] Deborah Smithies, August 2007
[3] An offer can be revoked at any time before it is accepted, so long as you inform the person you made the offer to that the offer no longer stands.
[4] Lush J. in Currie v Misa (1875) LR 10 Exch 153.
[5] Sir Frederick Pollock, Dunlop v Selfridge Ltd [1915] AC 847.
[6] One party receives only what the other party was already obligated to provide.
[7] The consideration received by one party is essentially worthless.
[8] UNIDROIT Principles (2004) Article 2.1.2 and 3.2.
[9] Consideration must move from the promisor, it does not necessarily have to move to the promisee. The promisor may provide consideration to a third party, if this is agreed at the time the parties contracted.
[10] If the subject matter of a contract is illegal, none can enforce the contract. A contract for the sale of illegal drugs violates public policy and is not enforceable.
[11] Sometimes an oral contract is referred to as a “verbal contract”, the term “oral” means “spoken” while the term “verbal” can also mean” in words”. Under that definition, all contracts are technically “verbal”. If you mean to refer to a contract that is not written, although most people will recognize what you mean by “verbal contract”, for maximum clarity it is helpful to refer to it as an “oral contract”.
[12] For example, if there is any MOU (Memorandum of Understanding) exist between two parties, then we say that an Express Contract.
[13] For example, doesn’t matter whether there is any MOU but the contract acts like a written contract.
[14] A quasi contract is not really a contract at all in the normal meaning of a contract. It is really an obligation imposed on a party to make things fair.
[15] The fact that a contract is not completed within one year does not mean that it is voidable under a statute of frauds. For the statute to apply, the actual terms of the contract must make it impossible for performance to be completed within one year.
[16] Under the Uniform Commercial Code, to satisfy the statute, the writing for the sale of goods need only be signed by the party to be charged, and a quantity term.
[17] Sometimes the phrase “verbal contract” is used to describe an unwritten or “oral” contract. As one meaning of “verbal” is “in words”, in order to avoid any ambiguity it is usually best opt refer to unwritten contracts as “oral contracts”.