Elements of a Legal Contract

© Oxford University Press, 2007. All rights reserved.
Definition of a Legal Contract
A legal contract is an agreement between two or more parties in which
legal rights and obligations are created, and are enforced by a court.
The Elements of The Contract
Elements of a Valid Legal Contract
For a contract to be legally enforceable the contract must contain the following
elements:
(1) AN OFFER
(2) ACCEPTANCE OF THE OFFER
(3) CONSIDERATION
(4) INTENTION TO CREATE LEGAL RELATIONS
(5) CERTAINTY OF TERMS
(6) CAPACITY TO CONTRACT
All of these elements must be present before there is a valid and legally
enforceable contract.
Chapter :-02

Elements of a Contract:
1) Offer
What is an offer?
– Does not have to be in writing
– Promissory: Promise to do something or to refrain from doing a
certain act
– Intention: To be legally binding
– Communication: To Promisee
– Certainty: Terms must be clear & certain
– Finality: Must be a degree of finality with the terms((
Objective Test:
Reasonable person test
Standard applied by courts
Contract Law v Criminal Law
Contract law applies objective test to determine liability
Criminal law applies subjective test to determine guilt

Offers v. Invitations to Treat
Invites a person to make an offer to buy something e.g. a price tag on
a pair of jeans is an invitation and the decision of customer to buy is
an offer.
– Shop Displays
– Advertisements
– Catalogues
– Sales Puffery
– Vending Machines
An offer must be made to another person
Offeror: party that makes the offer
Offeree: party that receives the offer
Offer must be communicated
Offeror to Offeree
Mode of Communication
Verbal/ Writing/Post
Contemplation of the Parties

Termination of an offer
An offer can be terminated through the following ways:
(1) Revocation
(2) Lapse
(3) Rejection By Offeree
(4) Implied rejection : counter offer
Eg - A offers to sell his car to B for $1000. B says to A, “I will
give you $750". B statement amounts to a counter offer
which terminates the original offer by A

Do you have a valid offer?
Offer
Do you have valid
offer?
Yes
No
Preliminary
Inquiries
Supply of
Information
Invitation To Treat

2) Acceptance
• An acceptance is a final and unqualified assent to all the terms of the
offer.
Rules of acceptance :
(1) Offer still in force
(2) Offer to made by the offeree
(3) Unqualified an absolute
(4) Acceptance can be in writing, oral or by conduct
(5) Silence does not constitute an acceptance
(5) Communication
• Communication of acceptance
• Completed acceptance
• Reasonable time

• Postal acceptance rule
Limitations to the rule
• letters and telegrams
• instantaneous methods of communication
• addressed and stamped
• actual communication contemplated

Do you have a Valid Acceptance?
Acceptance
Must Match the
Terms of the Offer
Communication
Exceptions
Postal Acceptance
Unilateral
Contracts

3) Consideration
• Applies to all contracts other than contracts made under
seal/ deed. Contracts made under deed form do not require
consideration.
1) Definition
Consideration is an essential element in every simple contract.
The doctrine of consideration requires that:
(1) there must be an exchange between the parties, involving either a
promise for promise, or promise for performance; and
(2) the promise or performance given in exchange must have value.

• Rules of Consideration
• Consideration does not have to be adequate
• Consideration must be sufficient
• Consideration must not be illegal
• Consideration must move from the promisee
• Past consideration is not good consideration

Rules of ConsiderationConsideration
Involves a mutual
exchange
Must not be pastCannot be illegal
Must not be
ilusory

Renegotiating Debts
• Performing existing contractual obligations does not amount to good
consideration to enforce a promise : Foakes v Beer
Example (1) : A owes B $100. A decides to pay B $90 in full satisfaction of the
debt. B then sues A for the balance ($10). B will succeed because there is no
consideration for his promise to accept $90 for full payment : Foakes v Beer
Example (2) : A owes B $100. A decides to pay B $90 earlier for full payment.
B will not succeed for the further $10 because A has done something extra, he
has paid earlier : Pinnels case.

3) Consideration cont…
• Promissory Estoppel
The strict application of the doctrine of consideration is
modified with the doctrine of promissory estoppel. The
doctrine of estoppel operates to enforce certain promises which
have not been supported by valuable consideration.
Elements of the doctrine of estoppel:
– There must be a promise by the promisor to the promisee
– The promisee must have relied on the promise
– The promisee will suffer detriment if the promisor is allowed to go back
on his promise
– It would be unconscionable (unfair) to allow the promisor to break his
promise

Elements of Promissory Estoppel
Promissory
Estoppel
Promise/
Representation/
Assumption
Reliance Material Detriment Unconscionability

Promissory Estoppel cont…
Walton Stores v Maher
• Walton’s case was seen as important in the development of the doctrine,
because it extended the operation of the doctrine to create a new right of
action.
• Promissory estoppel only operates when all the above elements have been
satisfied. Promissory estoppel has its origins in the High Trees Case. The
doctrine has been extended in the High Courts decision in Walton Stores.
• The principle of promissory estoppel only applies when it would be
inequitable/unconscionable (unfair) to allow the promisor to go back on his
promise.

Promissory Estoppel cont…
Example:
• A enters into a lease agreement with B. The lease
provides that A pays B $500 weekly rent. A then falls
into financial difficulty and asks B if he could reduce
the rent for 12 months to $300. B agrees. A relies
on B’s promise to accept $300 rent, and pays him
that amount. 12 months later B sues A for the
difference in rent ($200 week).
• Advise A.

4) Intention to Create Legal Relations
• Commercial agreements
For a contract to be legally enforceable there must be an
intention by the parties to be legally bound. In Commercial and
Business Agreements there is a presumption that the parties
intend to create legal relations: Edwards v Skyways.
Exclusions:
1) Express
This presumption can be rebutted but the onus is on the party seeking to exclude legal relations.
An express exclusion of intention by the parties will be given effect by the courts.
2) Social & Domestic Agreements.
There is a presumption that social and domestic agreements are not intended to create legal
relations. However this can be rebutted by evidence to the contrary.

4) Intention to Create Legal Relations cont…
• Husband & Wife Agreements
The courts consider domestic arrangements between
husband and wife to be social agreements and not legally
enforceable: Balfour v Balfour.
Exceptions:
If the agreement between husband and wife involves
essentially a commercial matter then the agreement will be
enforceable : Milliner v Milliner.

Do you have an intention to create
legal relations?
Do the parties have
an intention to create
legal relations?
Yes
Check to see whether
the intention has been
expressly excluded
If intention has not
been excluded check
for other elements
No
Check if the
commercial
presumption applies
Check if the social/
domestic
presumption applies
If the commercial
presumption applies
check for other
elements

5) Certainty of Terms
• As a general rule the courts will not enforce vague or
incomplete agreements.
• However the courts will strive to fund a valid contract. If
terms are uncertain, the courts may clear the
uncertainty by the ff means:
- Trade customs & Usage
- Previous dealings between the parties to determine the
essential terms of the agreement.

6) Capacity to Contract
• The capacity of certain persons to enter into
legal contracts may be affected.
• Especially minors, drunkards and bankrupts.

6) Capacity to Contract – Minors
Minors
• Minors are any persons below the age of 18.
• Contracts with minors fall within three categories:
- Valid
- Voidable; and
- Void
• Valid Contracts - 2 types: Contracts for Necessaries
and Contracts for Beneficial Service.

– Minors cont…
Contract for Necessaries
• Necessaries are defined as goods suitable to the condition in life of such a
minor and to his actual requirements at the time of such sale and delivery.
Two important questions arise:
(1) Can the goods/services be classed as necessaries for a person in the
circumstances of the minor in question?
(2) Were the goods/services in fact necessary to the minor at the time?
• If the answer is yes to both these questions then there will be a valid contract
and the minor will have to pay.
• Examples of goods/services which are necessaries include: food, housing,
education, medical and legal expenses.

– Minors cont…
Contracts for beneficial services
• The key question here is to ask:
Does the contract of service provide a benefit to the minor?:
Hamilton v Lethbridge.

– Minors cont…
Voidable Contracts
• These are contracts which can be avoided by the minor
before he/she turns 18 or within a reasonable time after
he/she turns 18.
• They apply to contracts which are of a permanent
nature/continuing obligation. Eg: shares, leases and
partnerships.
• With voidable contracts the minor can free himself from
future obligations, but will have to pay for benefits already
received.

– Minors cont…
Void Contracts
• Contracts other than for necessaries or beneficial contract of
service are void against the minor.
• Contracts involving loan repayments are also void against the
minor.

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