4 Essentials of a Valid Contract and Privity of Contract

A. 4 ESSENTIALS OF A VALID CONTRACT

 

For a contract to be legally binding, there are four essential elements to a valid contract: offer, acceptance, consideration and intention to create legal relations. Normally the question of whether the parties have agreed is tested by asking whether one party has made an offer which the other has accepted. Agreements may not give rise to a binding contract if they are incomplete or not sufficiently certain (i.e. an agreement to agree).

 

1. Offer

It is important to distinguish between offers, which can be accepted, and an "invitation to treat" which is an invitation to someone for them to make an offer, which the first party can then accept. An invitation to treat gives the party who issues the invitation control over when (and if) the contract is made. There is no requirement to have an invitation to treat: a valid contract can be formed when an offer is accepted. On auctions, it is the bid which is the offer.

 

2. Acceptance

An acceptance is agreement to the terms of an offer. Offers can be accepted by conduct. If someone purports to accept an offer, but does so on different terms that will be a counter-offer, rather than an acceptance. The acceptance must normally be communicated to the offeror. Generally, silence cannot be treated as an acceptance. In exceptional circumstances (for example, where the offeree has been given terms of dealing and the offeree proceeds with the dealing without formally communicating acceptance) silence may be treated as an acceptance.

 

3. Intention to Create Legal Relations

An agreement may be incomplete, for example where the parties have agreed on essential matters of detail but have not agreed other important points, although an agreement may be complete even if it is not worked out in meticulous detail. There will usually be no contract if the parties agree "subject to contract" but never agree on the terms of the contract.

 

For an example of an MOU in relation to a joint venture, please see the below:

https://docpro.com/doc189/memorandum-of-understanding-mou-joint-venture-neutral

 

4. Consideration

This can be something of benefit to the person who has the obligation or who makes a promise to do something (called the promisor) or something which is a detriment to the promisee (the person who wants to enforce the obligation or who has the benefit of the promise). As long as some value is given for the promise, the courts will not consider whether "adequate" value is given.

Where the consideration of one party is not absolutely clear, the agreement will generally include languages such as "FOR GOOD AND VALUABLE CONSIDERATION, the receipt of which is hereby acknowledged" into the recital. Alternatively one can make the document in a deed.  

 

What is a Deed? 

Where there is a promise to do something but lacks consideration, it must be made in a deed. A deed is a document under seal which either (i) transfers an interest, right or property or (ii) creates an obligation which is binding on someone or some persons or (iii) confirms an act which transferred an interest, right or property. Not all documents under seal are deeds. There are special requirements on the execution and delivery of deeds. A contract under seal is an example of a deed. No consideration is required for a contract contained in a deed. A person identified in the deed as someone to benefit from a promise in the deed can enforce a promise to pay money or can seek damages if the promise is not performed. However, equitable remedies (e.g. specific performance of obligations other than to pay money) are not available if there is no consideration.

 

For example, where a party would like to join an existing agreement without clear consideration, the party would enter into a deed of adherence:

https://docpro.com/doc379/deed-of-adherence-to-agreement-general

 

B. PRIVITY OF CONTRACT

 

What is Privity of Contract?

Prvity of Contract is a common law doctrine which provides that a contract cannot confer rights or impose obligations which arise under the contract on anyone other than one of the parties to the contract. As such, the only parties to contracts should be able to sue to enforce their rights or claim damages under a contract are the parties to the contract. However, there are issues associated with contracts made for the benefit of third parties who are unable to enforce the contractual rights as they are not the contracting parties under the contract.

For example, Andrew and Ben entered into a contract under which Andrew agreed with Ben to give a valuable diamond to Carrie. Both Andrew and Ben fully intended for Carrie to take the benefit of Andrew’s promise. Under the doctrine of privity of contract, if Andrew for some reasons does not give the diamond to Carries, Carrie cannot sue Andrew as it is not a party to the contract. Ben can sue Andrew for breach of contract, but Ben will only be entitled to nominal damages as Ben has not suffered any actual loss.

 

Right of Third Parties

In certain common law jurisdictions such as England, some states in Australia, New Zealand, Hong Kong, Singapore, and some provinces in Canada, the parties to a contract can agree that someone who is not a party to the contract can enforce a term of the contract. This will apply to give a third party a statutory right to enforce a contract term where the term of the contract :

(i) expressly provides that the third party may enforce a term of contract; or
(ii) purports to confer a benefit on that third party.

It is also possible to expressly contract out of such statutory right in these jurisdictions by including a term along the line of:

 

"No Rights under Contracts for Third Parties

 A person who is not a party to this Agreement shall have no right under any law to enforce any of its terms."

It is not possible to use a contract to impose an enforceable obligation on someone who is not a party to the contract. However, a similar effect may be achieved by conferring a benefit subject to the third party meeting a condition.

 

Capacity

The law presumes that a party to a contract has the capacity to contract. Minors (children under 18) and mentally disordered people do not have full capacity to contract. It is for the person claiming the incapacity to prove it. There are special rules which apply to corporations (including companies), unincorporated associations (including clubs and trade unions), the government (including any government department or officer), public authorities (including local government bodies, state-owned enterprises), organisations and charities.

 

Joint and several liability

Joint liability arises where two or more people jointly agree to do the same thing. If either (or any) of the joint obligors (i.e. the people who have the obligation) performs the obligation, the others are discharged from their obligations. There are strict technical rules of law that apply to joint liability. A liability can also be joint and several. Two or more people jointly promise to do the same thing and also severally agree to do the same thing. Performance by one will discharge the liability of all of them. It is presumed that liability is joint where a promise is made by two or more people. If this is not the intention, express wording should be included to make the obligation several.

 

Please note that this is just a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your local lawyer.

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