Contract ‘Terms’ Explained
Term: contract
A contract is a binding agreement between at least two parties.
Overview of Contracts
In order to form a contract, the essential elements are:
i. offer
ii. acceptance
iii. consideration
iv. capacity
v. intention to create legal relations
vi. no vitiating factors
Offer
An offer is a promise to do or not to do something in sufficiently clear terms, that may be accepted by another. An offer should be distinguished from an invitation to treat and a mere expression of intention to do or not to do some act. Offers do not necessarily need to be made to one person – that may be made to the world at large or to specific groups of people.
The significance of an offer is that when it is accepted (subject to the other essential criterion, below) the contract is formed.
In addition to being accepted, an offer may be rejected, a counter-offer may be made, the offer may lapse or the offeror may withdraw the offer, such that it is no longer available to be accepted.
Option Agreements prevent an offer being withdrawn for a period of time.
Acceptance
When an offeree (the “acceptor”), accepts an offer, the contract is formed. Acceptance may be in writing, orally or implied by conduct and silence cannot amount to acceptance of an offer other than in unilateral contracts or the postal acceptance rule applies.
Consideration
Consideration is a promise, an act, or a promise not to act and represents the value in the contract. For example, in a services contract for services, one person will promise to perform services (the consideration of one party), and the other will promise to pay money in exchange for the service (the other party’s consideration). Consideration in a contract may be executory, executed or past. Executory consideration is a promise that will be performed in the future, executed consideration is a promise that has been performed thus giving rise to the obligation on the offeror to perform their promise, and past consideration is where a promise is performed before the formation of the contract and as such cannot be used to bind the other party to the contract: importantly, past consideration is not sufficient to form a binding contract.
Consideration must move from the promisee, as the English common law system does not enforce gratuities as the civil law system does. Also, consideration need not be adequate, but must be sufficient. That is to say that there is no requirement in law that the value of the consideration between the parties must be equal or near equal provided there has been no vitiating factors.
Capacity
In order to enter a contract, a party must have the legal capacity to do so, and as such cannot be a bankrupt or a minor (subject to the Minors’ Contracts Act 1987). Under this Act for instance minors are able to enter into contracts for necessities.
Intention to create Legal Relations
The parties must intend that the offer and acceptance be binding upon them. There is a presumption operating in commercial contracts that the parties intend to create legal relations.
Construction of Contracts: General Principles
The interpretation of the terms of a contract is a question of law an exclusively within the jurisdiction of the judge. Courts will construe contracts, rather than make contracts. Each term does not need to be completely unambiguous: a judge will construe the contract by giving each term its ordinary and everyday meaning unless there is some basis to depart from this general rule. As a matter of construction, the parties are to be confined to the terms contained within the four corners of the document in which they have chosen to record their agreement. Construction places emphasis on the manifested intentions of the terms contained in a contract and not the parties actual intentions. Accordingly, even though one or more terms may be ambiguous the contract does not fail for uncertainty.
Privity of Contract
The doctrine of privity of contract consists of two general rules: firstly, a third party cannot be subjected to a burden of contract to which he is not a party. The second is that a person who was not a party to a contract could not sue upon the contract in order to obtain the promised performance. This rule has been altered by the introduction of the Contracts (Rights of Third Parties) Act 1999.
Assignments of Contractual Rights
The burden of a contract cannot in principle be transferred so as to discharge the original contracting party without the consent of the other party. There are two exceptions. If the contractual rights have been assigned, those rights will be subject to the original contract. An instance of this, Britain & Overseas Trading Ltd v Brooks Wharf Ltd, an exemption clause in the original contract was binding on the assignee of the contract. Such cases are examples of the “conditional benefit” principle. This principle applies where the right which has been assigned is on the condition that certain restrictions are observed. These are an intrinsic part of the right, so that the burden is annexed to the benefit of the contract. Therefore, the person with the benefit must perform the burden, or otherwise forego the benefit. Whether a conditional benefit arises is dependent upon the proper construction of the contract.
The second exception is the pure benefit and burden principle, which arose in the case Tito v Waddell (No.2), where the rights given in the contracts were not qualified nor conditional on certain obligations, but still rendered the defendants liable.
Term: offer and acceptance
Offer
An offer is a promise to do, or not to do something that is capable of acceptance by another person. When an offer is accepted by another person, provided that the other 3 legal requirements for a contract are made out, a legally binding contract is formed. An offer is made by an offeror to an offeree. It may only be accepted by a person who knows that it exists.
When an offer is made, it may (1) lapse; (2) be rejected; or (3) be revoked prior to acceptance [subject to any conditions attached to the offer]; or (4) a counteroffer may be made, which automatically rejects the offer preceding it. These events are important in the context of contract disputes as it is the order of events that determines the extent of any contractual relationship between the parties in the circumstances. For instance if an offer is met by a counteroffer, the original offer cannot form part of the contract, as it has been implicitly rejected at law. One then moves to the counteroffer to ascertain whether that ‘revised offer’ has been accepted. If it has, then that will form the subject matter of the contract; if not, one moves to the next event in time to ascertain whether or not a binding contract has been formed, and so on.
An invitation to treat should be distinguished from an offer. An invitation to treat is an invitation for someone to make offers in respect to the particular goods or services. An invitation to treat thus cannot be accepted to form a legally binding contract.
Invitations to treat and offers should be differentiated from a declaration of intention, which is a statement that offers will be invited in the future.
Acceptance
Acceptance of an offer creates a legally binding contract provided that any persisting prerequisites are satisfied. An offer may be accepted any means, however if the offer specifies the means by which it must be accepted, then only that method will suffice to perfect the formation of the contract.
Acceptance is usually communicated either orally or in writing. It may be inferred by the conduct of the parties. It is not open for the offeror to say that the offer will be treated as accepted by the offeree unless he hears differently from them. Mere silence and inaction is inadequate to constitute an acceptance.
Acceptance must take place while the offer is in force, namely that it has not been revoked or allowed to lapse. It must be on the same terms as the offer. Where there is a variance between the offer and the purported acceptance, the purported acceptance is treated as a counteroffer.
Furthermore, acceptance must be unconditional; that is to say for example if some further step is required, then the communication will not be considered an acceptance. For instance, if the offeree states the acceptance is subject to contract, the communication cannot be considered an acceptance as another step would be required to properly form the contract. Lastly, the acceptance must be communicated to the offeror. Communications (email, facsimile, SMS message or text message) are equally effective from the time they are received by the offeror. Acceptance made by letter may be considered effective when the letter was posted, rather than when it was received by the offeror (the ‘Postal Acceptance Rule’).
Term: conditions of contract
In any contract, whether oral, written, or partly oral and partly written, each of the terms of a contract are either a condition or warranty. Whether a term of the contract is a condition or warranty relies on their relative importance in the particular contract. Rules of construction of contracts allow courts to resolve ambiguity and uncertainty in properly classifying whether a term is a condition or warranty. Accordingly the phrase ‘conditions of contract’ is not a reference to all the terms of the contract, but to the conditions (as opposed to warranties) contained in the particular contract.
There is a further class of terms referred to as ‘intermediate terms’ which may be either conditions or warranties in the agreement. The decision relies upon the nature and consequences of the breach of contract.
A condition is an essential stipulation in a contract which a party promises to perform or fulfill. A breach of such a term (i.e. the condition of the contract) permits the innocent party to terminate the contract such that the parties have no further obligations to perform the contract and claim damages for losses suffered as a result of the breach. Thus conditions of contract are at the very root or substance of what the parties agreed, and are so essential to the agreement that the failure to perform or perform improperly by the other party may be considered a substantial failure to perform the contract at all.
Words and conduct by the parties may contribute to a finding that a term of the contract is at law a condition of the contract. A term may also be considered a condition as opposed to a warranty as a result of the nature or purpose of the contract.
Term: consideration: contract
Consideration is the thing of value that one party promises for the their contracting party. It is a promise that has some value, ie to do something or to pay money. Consideration must move from each contracting party in order to create a legally binding contract at law in England.
Originally posted by Kev on October 27, 2010 on Tír na Saor @: http://freemanireland.ning.com/forum/topics/explanation-of-terms-re
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Reply by sam on October 27, 2010 at 3:37pm
Kev,
This is a fantastic definition of terms. On a quick read through there are a couple of things I think we could add.
1. Terms and conditions need to be added to the short “essential elements” list.( I note that there is a very good paragraph on terms of contract later on)
A contract can be rendered void if the acceptee has not seen full T&C’s. I’ve used this very successfully with Court Bailiffs after my Mum had accidentally contracted and I got the contract voided because she hadn’t seen the T&C’s. I also used the Doctrine of Privity in contracts to establish that any contract between the Bailiff company and the Court was non-binding on my Mum as a third party, (which rendered any powers granted to the Court Bailiffs by the court null and void, as there was no refusal to pay the principal court fine of £100, instead of the Bailiff’s fees of £2000!)
The court would not accept a direct payment schedule of the principle sum and said my Mum had to deal with the Bailiffs. So I also used the contract rules of consideration against the Bailiff company in two ways:
1a The Bailiff company claimed that she had broken the original contract by missing the first payment, so payment in FULL with fees was due and would be collected and goods seized. I voided the original contract by pointing out that she had made no consideration so, there was no legal acceptance and therefore no contract to breach. They protested but had to accept it.
1b I emailed an offer of contract to pay the principle court sum ONLY, by instalments, on Mum’s own terms with her own T&C’s. Within seconds, I then made the first payment via their automated phone line knowing that they HAVE to accept any payment made for the Court. I then sent an email confirming that the offer of contract had been accepted because the consideration had been accepted. Mum was able to pay off the fine over 6 months with NO Bailiff fees. They, of course, protested and tried lots of sneaky tricks to re-contract, but we were onto them and they knew they had no legal leg to stand on. So Fine paid on her own terms, no visits, no fees, no threats. Result – Bailiff Company 0 – Freemen 1 LOL!
2. Beware Adhesion Contracts! These are used all the time by the authorities and their enforcers, especially within NOTICES. Here is a short definition from the online legal dictionary:
A type of contract, a legally binding agreement between two parties to do a certain thing, in which one side has all the bargaining power and uses it to write the contract primarily to his or her advantage.
An example of an adhesion contract is a standardized contract form that offers goods or services to consumers on essentially a “take it or leave it” basis without giving consumers realistic opportunities to negotiate terms that would benefit their interests. When this occurs, the consumer cannot obtain the desired product or service unless he or she acquiesces to the form contract
Alas, these are mostly valid contracts. There is a defence – you can claim that the adhesion contract is “Unconscionable”, so unfair to the weaker party that a Court will refuse to enforce it. Although not much help if the AD has been issued by the Court’s enforcers or other authorities! In my experience, the best approach is to recognise and respond immediately with an “offer of Contract rejected” on any ‘NOTICE’, ‘summons’ or ‘demand. – They’re just offers of contract and the power to choose who we contract with or reject lies with us.
