Business Law Notes on Contracts 1

ELEMENTS OF A VALID CONTRACT

For a valid contract to exist, seven elements must be present:

1. An intention to create legal relations - The parties must have intended to create a
legally enforceable agreement.

2. Offer - One party indicates its intention to enter into a contract on certain terms.

3. Acceptance - The other party agrees to enter into the contract proposed by the offeror.

4. Consideration - When conveying acceptance, the offeree promises or gives something of

value to the offeror.

5. Certainty of terms - The parties must reach agreement on all of the essential terms in the
contract.

6. Capacity to contract - The parties are legally permitted to enter into the contract (Parties
have required age to enter into Contract, Parties do not have limited capacity, they are not
insane and etc).

7. Legality - The purpose of the contract is legal.

Offer (Half of the agreement)

The first element required for contract formation is an offer, which is an invitation by one
person (the offeror) to another person (the offeree) to enter into a contract. To be valid, an
offer must be externally manifested and it must be definite. The external manifestation test
requires an offer to be manifested by words or conduct. The definiteness test means that an
offer may not leave any doubts as to its terms and conditions. An offer must be definite,
embody the significant conditions of the proposed contract, express the intention of the
offeror to conclude a contract with the offeree and be addressed to a particular person.
An offer may also stipulate a time period for acceptance. There is a presumption that an
offer is irrevocable prior to the expiration of the stipulated time limit or, absent such time
limit, within a reasonable time. But, the offeror could stipulate that the offer may be
withdrawn at any time. Also, the revocability of an offer may be inferred from the nature of
the offer or from the totality of the circumstances in which it was made.
Under the EU, Anglo-American and the CIS law, an offer is to be distinguished from
the solicitation of an offer, which is a mere invitation to make an offer. For example, an
advertisement is not an offer but merely an invitation to make an offer. Typically, an
advertisement is addressed to members of the public, provides generalized information
about a product or service and is intended to solicit an offer from the public.
The EU, Anglo-American and the CIS law distinguishes between a particularized offer
(addressed to a particular person) and a public offer. A public offer is addressed to an
indeterminate number of persons, contains the significant conditions of the proposed contract
and explicitly expresses the intention of the offeror to enter into a contract with any person
who accepts the terms of the offer. Finally, an offer could be either written, oral, through an
act, or a combination of these.

Ways in Which an Offer May Be Terminated

Lapse An offer lapses if:

1.The offeree fails to accept the offer within the time period specified in the
offer;
2.There is no set period for acceptance, and the offeree fails to accept within a
reasonable time—the court will look at the subject matter, volatility of the
market, and industry practices; or
3.Either party dies (Death ( personal services)or becomes incapable (unless
the contract states that it is intended to bind heirs and estates).
Revocation Revocation is withdrawal of an offer prior to acceptance by the offeree.
Revocation must be communicated in a way that a reasonable person would
understand it to be revoked. It is effective when the revocation is actually
received by the offeree.
Rejection This is refusal of an offer by the offeree. It may be done expressly, by stating
that the offeree will not accept the offer, or it may be indicated by conduct
that justifies the offeror’s belief that the offeree did not intend to accept the
offer.
Counter-Offer The offeree responds to the offer by indicating a willingness to enter into a
contract but on different terms. A modification of an offer usually amounts to
a counter-offer. If a counter-offer is made, the offeree has rejected the
original offer, and it is terminated.
Failure of a condition precedent also terminates an offer.
An inquiry by the offeree regarding the terms of the offer does not amount to either a
rejection or a counter-offer.

Acceptance (Half of the agreement)

The second element of contract formation is an acceptance, which is a response from the
addressee expressing acceptance of the offer and an intention to enter into a contract with the
offeror on the terms and conditions stipulated in the offer. An acceptance must be total and
unconditional. Under this rule, an acceptance must be a firm expression of commitment; the
commitment may not be conditioned on any further act by the offeree or the offeror; and the
commitment must mirror the terms stipulated in the offer.
The form of an acceptance depends on the nature of the contract/industry itself. It can be
oral, written or expressed by conduct. The law in majority countries creates a presumption
that silence or lack of action does not constitute an acceptance. This presumption may be
overcome if it can be inferred from statute, business custom or the existing business
relationship between the parties that silence or non-action constitutes acceptance. To be
valid, the offeror must receive the acceptance within the time limit stipulated in the offer or,
absent such time limit, within a reasonable time from when the offer was made. Acceptance
of an offer on terms different from those in the offer is neither total nor unconditional. As
such, a modified acceptance is not regarded as an acceptance, but rather as a counter offer.
Therefore, any modification of the terms of an offer, including insignificant modifications,
transforms the offeree's answer into a counter offer.
 Typically, the contract itself stipulates where or when it is concluded. If it fails to do so,
a contract is considered concluded at the offeror's place of residence (if the offeror is a
natural person) or at the offeror's seat (if the offeror is a legal person/company).
Generally, a contract between absent parties (inter absentes) is deemed concluded when
the offeror receives the acceptance. 188 The European and most of the countries rules,
however, reject the "mailbox theory" of Anglo- American common law and the "knowledge
theory" of French law, but is similar to the "time of arrival theory" in German law. If the law
requires that the contract must be registered with a state agency, then it is concluded at the
time of registration. If the contract calls for the transfer of property, it is considered
concluded at the time the property is transferred.
The format of communication of an acceptance may be detailed in the offer. However, as
long as the way in which acceptance is communicated results in the acceptance being
received within the same time frame as if it had been done using the method specified in the
offer, and as long as industry practice is followed, the court will deem it proper
communication. More specifically, acceptance by mail is deemed to be effective when a
properly addressed and stamped letter of acceptance is dropped in the mail unless the offer
indicates that acceptance should be by means other than post; in that case, acceptance is not
effective until the offeror receives the letter.

In a unilateral contract, the offer is accepted by performing one or more acts required by the
terms of the offer. For example, the purchaser of a preventive medicine accepts the
manufacturer’s offer of a money-back guarantee simply by purchasing the product. There is
no expectation of formally communicating an acceptance to the manufacturer. The obligation
now rests with the manufacturer to perform its part of the bargain.

Consideration
Consideration is the price for which the promise (or the act) of another is bought. It is an
exchange of value that must move from each party of the contract but not necessarily to the
other party. It is enough to promise a benefit to someone; it is not necessary to provide a
benefit to the other party to the contract.
There must be sufficient consideration, which is anything of value in the eyes of the law.
However, consideration does not have to be adequate, meaning that it does not need to have
the same value as the consideration given in exchange. The court will not assess the adequacy
of the consideration unless there are special circumstances such as suspicions of fraud or
undue influence. However, a person who requests goods or services from another is obligated
by an implied promise to pay a reasonable price for the goods or services.

Examples of Consideration Examples of Items that are NOT Consideration

Money
Forbearance to sue: promise not to
pursue a lawsuit (it is applicable to
Anglo-American/common law system)
Natural love and affection.
Past consideration: something a party did prior to
contemplation of a contract cannot given in exchange
for the other party’s consideration; in this case, there is
no mutuality of consideration.
Promise to perform a pre-existing Pre-existing public duty: public servants cannot use a
contractual obligation to a third party promise to complete their public duties as consideration
for a new contract since that would be offering nothing
new.
Pre-existing contractual obligation to the same party: the
law does not allow the same person to pay twice for the
same benefit.
A final point in contract formation/creation is the time at which the contract enters into force.
Under contract laws of many European and civil law countries, a contract shall enter into
force and become obligatory for the parties from the time of its formation. As a general rule
formation occurs when the offeree accepts the offer. The parties, however, may stipulate that
the contract conditions are applicable prior to its conclusion.
For a U.S., UK and common law lawyer, the following comparative features of
European/civil law stand out. European law and laws of many civil law countries do not
require an exchange of promises for formation. Instead, the exchange of promises that looks
to a future performance is present only in an executory contract.

Exceptions to the Requirement for Consideration

The law recognizes and enforces agreements made under seal e.g. deeds.

Essential conditions of the Contract

Another requirement for contract formation is that an agreement must be reached on material
conditions. Under contract laws of many European and other Civil law countries, there are
three types of conditions: significant, general and specific. Significant conditions are those
that must be met in order for a particular contract to come into existence -(this rule exists
almost in all countries of the world). A general condition is one that is generally associated
with a given type of contract. Normally it is stipulated by law and automatically becomes
effective when a given type of contract is formed. Typically, a general condition does not
need to be negotiated by the parties, which is not equivalent to it being involuntarily
incorporated into the contract. Rather, it is stipulated by law and the parties, by entering into
the given type of contract, consciously and voluntarily adopt the condition. If the parties do
not wish to adopt the statutorily stipulated general contract conditions, however, they can
vary such conditions by mutual agreement. Lastly, specific conditions are those that
supplement or modify the general conditions. In any contract, the parties are free to include
specific conditions that fit their purpose.
This requirement of contract formation focuses on the significant conditions. They
include the following: conditions relating to the object of the contract, conditions stipulated
by law as essential for a particular type of contract and conditions stipulated by one of the
parties as significant for this contract. Thus, the meaning of significant contractual
conditions varies from one contract to another.

Certainty of Terms

Three issues could arise that will cause a contract to fail for lack of certainty of terms:
 1. Incompleteness: The omitted terms are so important that they warrant the conclusion
that the parties have not yet reached an agreement; for example, lack of a price or a
formula to determine the price.
2. Agreements to agree: A fundamental item is explicitly left subject to
negotiation or agreement within a contract.
3. Vagueness: A term is so vague or imprecise that multiple meanings can be
reasonably supported.

Privity of Contract
Only a party to a contract may sue to enforce it, but there are exceptions
A person entitled to benefit under third party motor insurance can sue the insurer. A principal
may sue to enforce a contract entered into by his agent. Where a special relationship exists;
for example, an executor may sue to enforce a contract entered into by the deceased. A
beneficiary may sue a trustee. A manufacturer of goods may be sued by the ultimate
consumer. An employer may be sued for the negligent acts (tort, not contract) of its
employees.

Conformance with the Requisite Form

Another element in contract formation is conformance with the requisite form, which may be
directed by law or stipulated by the contract. Unless otherwise required by law, the general
rule is that the parties may form a contract orally or they may agree to reduce their contract
to writing. In some situations, a statute may require that a contract not only be written, but
notarized as well. A statute may also require that a contract be in writing and be notarized
and registered with a state agency. For example, all contracts involving real estate fall within
this last category.