What are the 4 essential elements of a contract?
An agreement must contain four essential elements to be
regarded as a contract. If any one of them is missing, the agreement will not be legally
binding.
Offer
There must be
a definite, clearly stated offer to do something. For example: A quotation by
sub-contractor to the main contractor and an offer to
lease.
An offer does not include ball park
estimates, requests for proposals, expressions of interest, or letters of
intent.
An offer will
lapse:
- when the time for acceptance
expires;
- if the offer is withdrawn before it is accepted;
or
- after a reasonable time in the circumstances
(generally the greater the value of the contract, the longer the life of the
offer).
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Invitation to
treat
An invitation to treat is a mere declaration of
willingness to enter into negotiations; it is not an offer, and cannot be accepted so as
to form a binding contract. An agreement is not created if there is an acceptance of the
invitation to treat.
An invitation to treat is part of the
preliminaries of negotiation, whereas an offer is legally binding once accepted, subject
to compliance with the terms of the offer. For example: Invitations to treat
are advertisements, price lists, circulars and
catalogues.
Acceptance
Only
what is offered can be accepted. This means that the offer must be accepted exactly as
offered without conditions. If any new terms are suggested this is regarded as a counter
offer which can be accepted or rejected.
There can be many
offers and counter offers before there is an agreement. It is not important who makes
the final offer, it is the acceptance of that offer that brings the negotiations to an
end by establishing the terms and conditions of the
contract.
Acceptance can be given verbally, in writing, or
inferred by action which clearly indicates acceptance (performance of the contract). In
any case, the acceptance must conform with the method prescribed by the offerer for it
to be effective.
Intention of legal
consequences
A contract requires that the parties intend
to enter into a legally binding agreement. That is, the parties entering into the
contract must intend to create legal relations and must understand that the agreement
can be enforced by law.
The intention to create legal
relations is presumed, so the contract doesn't have to expressly state that you
understand and intend legal consequences to follow.
If the
parties to a contract decide not to be legally bound, this must be clearly stated in the
contract for it not to be legally
enforceable.
Consideration
In
order for a contract to be binding it must be supported by valuable consideration. That
is to say, one party promises to do something in return for a promise from the other
party to provide a benefit of value (the
consideration)
Consideration is what each party gives to
the other as the agreed price for the other's promises. Usually the consideration is the
payment of money but it need not be; it can be anything of value including the promise
not to do something, or to refrain from exercising some
right.
The payment doesn't need to be a fair payment. The
courts will not intervene where one party has made a hard bargain unless fraud, duress
or unconscionable conduct is involved.
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