Formation of Contract

Notes on the Formation of a Contract

The formation of a valid contract requires an offer, acceptance, consideration, intention to create legal relations, capacity to contract, free consent, legality of object, certainty, and possibility of performance. Understanding these essential elements helps ensure that agreements are legally enforceable, and that parties’ rights and obligations are clearly defined.

Offer

Definition: An offer is a clear, definite, and unequivocal proposal made by one party (the offeror) to another (the offeree) indicating a willingness to enter a contract on certain specified terms.

Communication: The offer must be communicated to the offeree. An offer is not effective until it has been received by the offeree.

Specificity: The terms of the offer must be clear and certain. Vague or indefinite offers cannot form the basis of a valid contract.

Types of Offers: Offers can be specific (made to a particular person) or general (made to the public at large).

Acceptance

 Definition: Acceptance is the unqualified agreement to the terms of the offer.

 Communication: Acceptance must be communicated to the offeror. Silence generally does not constitute acceptance unless the parties have a prior agreement or customary practice to that effect.

 Unconditional: Acceptance must be absolute and unconditional. Any variation of terms constitutes a counteroffer, not acceptance.

 Method of Acceptance: The offeror can stipulate the mode of acceptance. If no method is prescribed, acceptance can be communicated in any reasonable manner.

Consideration

Definition: Consideration is something of value exchanged between the parties to a contract. It can be in the form of money, goods, services, or a promise to act or refrain from acting.

Adequacy: The law does not concern itself with the adequacy of consideration, if it is something of value in the eyes of the law.

Mutuality: Both parties must provide consideration. A promise without consideration is generally not enforceable.

 Intention to Create Legal Relations

 Definition: There must be an intention by the parties to create a legally binding agreement.

 Domestic and Social Agreements: Generally, agreements in domestic and social contexts are presumed not to have legal intent unless proven otherwise.

 Commercial Agreements: Agreements in commercial contexts are presumed to have legal intent unless there is clear evidence to the contrary.

 Capacity to Contract

 Legal Age: Parties must be of legal age (typically 21 years or older) to enter into a contract.

 Sound Mind: Parties must be of sound mind. This means they must understand the nature and consequences of the contract.

 Disqualification by Law: Certain individuals, such as bankrupts or those disqualified by law, may lack the capacity to contract.

Free Consent

Definition: Consent must be given freely and voluntarily by the parties.

Coercion: Consent obtained by coercion (use of force or threats) is not free consent.

Undue Influence: Consent obtained by undue influence (exertion of pressure or influence by one party over another) is not free consent.

Fraud: Consent obtained by fraud (deception or false representation) is not free consent.

Misrepresentation: Consent obtained by misrepresentation (false statement of fact) is not free consent.

Mistake: Consent obtained under a mistake of fact or law can render a contract void or voidable.

Legality of Object

 Lawful Purpose: The object and purpose of the contract must be lawful. Contracts with illegal objectives are void.

 Public Policy: Contracts must not contravene public policy or be prejudicial to public interest.

Certainty and Possibility of Performance

Certainty: The terms of the contract must be certain and unambiguous.

Possibility of Performance: The performance of the contract must be possible at the time of formation. Contracts to perform impossible acts are void.

Formal Requirements

Written Contracts: Certain contracts must be in writing to be enforceable, such as contracts for the sale of land, contracts of guarantee, and others as specified by law.

Signature and Witnessing: Written contracts often require signatures of the parties and may need to be witnessed or notarized.