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Formation of Contract

Formation of a Valid and


Enforceable Contract
Agreement (Offer + Acceptance)
Intention to Create Legal Relations
Consideration
Must not be illegal or contrary to public policy
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(A) Offer & Invitations to Treat
An offer is an expression of willingness to contract made with
the intention that it shall become binding on the offeror as soon
as it is accepted by the offeree.
A genuine offer is different from what is known as an "invitation
to treat", i.e. where a party is merely inviting offers, which he is
then free to accept or reject. It is not an offer because there is no
intention to be legally bound. The following are examples of
invitations to treat:
There are 4 categories of invitations to treat
- advertisements in a newspaper
- display of goods on a shelf
- auction sales
- invitations to tender
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Invitations to Treat
Advertisements
As a general rule, an advertisement in a newspaper is not an
offer. It is an attempt to induce offers. This general rule is
displaced where the advertiser by his word or conduct shows
a clear intention to be bound, as is often the case in the
unilateral contract.
Display of Goods on a Shelf
A store owner who displays goods on a shelf with the price
attached does not make an offer. He is merely inviting the
public to make an offer to buy the goods at the price stated.
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Invitations to Treat
Auction Sale
The general rule is that in an auction sale, when the
auctioneer invites bids, this is not an offer but an invitation
to treat. When the bidder responds with a bid, he is in fact
making an offer and the auctioneer is then free to accept or
reject this.
Invitation to Tender
Generally a request to tender will be considered as an
invitation to treat. Any tender document which is submitted
in response to this request is an offer and the invitee of the
tender is then free to accept whichever offer he chooses.
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Termination of an offer

The various ways in which an offer may terminate:


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Termination of an Offer
(i) Revocation or withdrawal of an offer by the offeror
(ii) Counter offer
(iii) Lapse of time
(iv) Death
(v) Non-fulfilment of a condition precedent
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Termination of an Offer
(i) Revocation
A revocation is a withdrawal of an offer.
An offer can be revoked at any time before it is
accepted because there is no binding contract before
acceptance.
An offer cannot be revoked after it has been accepted.
A revocation must be communicated to the offeree to
be effective (by himself or by any other source). If it is
not, and the offeree accepts, there will be a contract.
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Termination of an Offer
Consider the following:
- By letter dated 1st October, A offered to sell goods to B.
- B received the offer on 11th October and immediately
accepted by fax.
- Prior to that, on 8th October A wrote a letter revoking the
offer.
He mailed this and B received it on 20th October.
- Is there a contract?
- Yes. The court would hold that the revocation came too
late and was not effective until it had reached B. A contract
was made when B faxed his acceptance.
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Termination of an Offer
(ii) Counter Offer
Sometimes a reply from an offeree comes in the form of a new
proposal, or counter-offer. It is really a new offer, which is then
open to acceptance or termination in some other way
(iii) Lapse of Time
Where an offer is stated to be open for a specified time only, once
that time expires and the other party has not responded, then
the offer automatically ends. If no time is stipulated, the offer
may lapse after a reasonable time.
(iv) Death
Where the offeror dies before the offer is accepted by the offeree,
the offer is terminated. If the offer is accepted before the offeror
dies, it may be enforceable against the estate if it is not of a
personal nature.
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Elements of a Valid Acceptance
Acceptance
An offeror can prescribe that the acceptance must occur in
a particular manner, eg by post or hand delivered or by
telephone.
An acceptance to an offer is only effective if it is
communicated to and received by the offeror. If something
impacts upon the ability of the offeror to receive word of
the acceptance, for example, because of interference on the
phone line or because the offeree is unable to speak clearly,
then there is no contract.
Silence does not amount to acceptance.
An acceptance of an offer must be absolute and
unqualified.


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Acceptance
When a counter offer is accepted then its terms and
not the terms of the original offer become the terms of
the contract.
Subject to Contract means that the parties do not
intend to bind themselves until a formal document
has been drafted and signed.

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Acceptance
The Postal Rule
A distinction is drawn between an acceptance through
instantaneous means and one in a contract by post.
The post office rule constitutes the post office as an
agent of the offeror.
It states that when an acceptance is placed under the
lawful control of the post office, it is effective even
without actual physical delivery to the offeror.
The postal rule applies to acceptance only and not to
offers.
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Acceptance
Consider the following example:
- A posted an offer to B on 2nd September. That letter contained a
clause which stated that A expected a response by the post.
- The letter was incorrectly addressed and reached B on the 5
th

September.
- B sent off a letter at once agreeing to all the terms contained in
the offer.
- On the 8th September, A not having heard from B, sold the item
to a third party.
- Was there a breach of contract?
- Yes, because a contract had been completed on the 5
th
September
when B posted the letter of acceptance. The post office was the
agent of A, the offeror and had received the acceptance on his
behalf.
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(B) An intention to create legal
relations
The parties must intend the agreement to be legally
binding. The law divides agreements into two groups,

(i) Social and Domestic group covers agreements between
family members, friends and workmates. The law
presumes that social agreements are not planned to be
legally binding.

(ii) In business agreements the presumption is that the
parties intend to create legal relations and make a contract.

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(C) Consideration
Consideration is often defined as some right, interest,
profit or benefit accruing to one party or the loss,
detriment or responsibility assumed by another party to
the contract.
Consideration is also a requirement of a legally valid
contract.
The basic reason for a contract; a person gives up
something of value in exchange for receiving something of
value through the contract.
Consideration must be lawful
Consideration must be sufficient but need not be adequate.

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Types of Consideration
Executory Consideration
Executed Consideration
Past Consideration

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Executory Consideration
This is where parties exchange promises to do
something in the future
A farmer promises to deliver vegetables to a restaurant,
and the restaurant promises to pay for the vegetables

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Executed Consideration
This is where the offeror promises something once the
offeree does something
The promise only becomes enforceable once the
offeree has done the action
If Jane loses her dog and offers to pay a reward to the
person who finds it, she does not have to pay until
someone finds her dog and returns it to her

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Executory v. Executed
Executory consideration consists of two promises
Executed consideration consists of one promise
followed by some action

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Past Consideration
Past consideration does not form a valid contract
Normally, consideration is given at the time the contract is
made or at a later time
Past consideration is where the action is performed before
the promise is made
This is not good consideration because the consideration
must be given in return for a promise
This cannot be the case if the action was performed before
the promise was made

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