What are the essentials of a valid contract?

A contract is an agreement which legally binds the parties whereby each party promises to do, or not to do something.
International Business Law: Text, Cases and Readings
For a contract to be validly formed, the following elements must be satisfied:

a) Offer
b) Acceptance
c) Consideration
d) Intention to Create Legal Relations

(a) Offer

An offer is a proposal which contains terms and conditions stated by the offeror to the offeree. It can be made in writing, orally or by conduct. An offer can be addressed to a particular person, a group of people or to everyone.

Carlill v Carbolic Smoke Ball Co. (1892)
An advertisement was published in several newspapers stating that it would pay 100 pounds to anyone who caught flu after using its smoke ball as directed for 14 days. The company further states that they had deposited 1000 pounds at the Bank to meet possible claims.

The above case is an offer made to “the whole world”. For advertisements made by an owner of a lost dog and whoever finds it and return it to the owner gets a reward. A contract for the payment of the reward would come into existence when Tom finds the missing dog and return it to the owner. Such contacts are referred to as unilateral contracts. The offeror may not know the offeree’s identity immediately because there is no exchange of promises.

In a bilateral contract, an offer is made to a particular person and there is an exchange of promises that give rise to mutual obligations. The parties would know the identities of each other for this type of contract.

Business Law: Texts and Cases(b) Acceptance

Acceptance is defined as an unqualified and unequivocal of assent to the terms of the offer. In the absence of any specific instructions in the offer as spelt out by the offeror, acceptance does not require any specific format and can be made in writing, orally or by conduct.

  • Communication of Acceptance
    Acceptance is not effective until communicated to and received by the offeror. Thus, if an acceptance is not received because of interference on a telephone line,
    or because the offeree’s words are too indistinct to be heard by the offeror, there is no contract. It must be communicated by the offeree or by someone with his authority.

    Powell v Lee (1908)
    P applied for the post of headmaster of a school. One of the managers, without authority, informed P that he had been appointed. It was held that there is no acceptance, as P was not informed by the person authorized by the board.

  • Silence
    It is a situation where acceptance may not require any communication, where the parties have agreed that the offeree’s silence is to be construed as his acceptance. Therefore, both parties must agree to it.

    Felthouse v Bindley (1862)
    After negotiations, P wrote to the D offering to buy a horse for 30 155s, adding that if he did not hear from the seller, he would consider the horse his at that price. It was held that D’s silence did not amount to an acceptance. An acceptance must be unqualified acceptance of the terms of the offer. It can neither be a counter offer.

(c) Consideration
Business Law Today, Standard Edition, 9th Edition
A promise is only legally binding if it is made in return for another promise or an act (either positive act or something given up), if it is part of a bargain. The requirement of “something for something” is called consideration. It may be defined as some benefit accruing to one party, or some detriment suffered the other.

There are 3 types of consideration:

  • Executory Consideration
    Here, the bargain consists of mutual promises. The consideration in support of each promise is the other promise and not a performed (executed) act.

  • Executed Consideration
    If one party makes a promise in exchange for an act by the other party, when that act is completed, it is executed consideration.

  • Past Consideration
    Consideration that was provided before a promise is made is considered as past consideration. Past consideration refers to consideration that was given without any contemplation of the promises made or consideration given independently of any promise. Therefore, past consideration is no consideration at all.

    Roscorla v Thomas (1842)
    P purchased a horse from D. After the sale was completed, D gave an undertaking that the horse was not vicious which was proved to be wrong. P’s consideration was in the past. The payment of the price was complete before the undertaking was given. P therefore gave nothing in return for the undertaking. It is not possible to sue in “something for nothing” situation.

Text, Cases and Materials on Equity and Trusts, Fourth Edition

  • Adequacy & Sufficiency
    Consideration need not be adequate (ie: equal) to the value of the promise given as long as it is sufficient.

    Chappel v Nestle (1959)
    Nestle Co offered to the public gramophone records of a certain dance tune at a price together with 3 chocolate bar wrappers. The wrappers were thrown away on receipt by the company. It was held that the wrappers were part of the consideration even though they were of no further value once received by the company.

  • Consideration Must Move From Promisee
    This maxim represents an alternative way of stating the basic rule of privity of contract. It means that the only person who can sue on a contract is the person who paid the price.

    Tweddle v Atkinson (1861)
    A couple married and their respective fathers subsequently entered into a contract indicating that each father was to pay a specified sum to the young husband, Tweddle, and that he is entitled to sue for the money. The fathers later died. Tweddle sued the executors for the money due to him. It was held that Tweddle could not enforce the contract. Being the reason that he was not a party to the contract, and no consideration flowed from him. From Tweddle’s perspective, the law viewed the fathers’ promises as gratuitous promises. 

  • Consideration Must Not Be Illegal, Vague or incapable of Performance

    This situation gives rise to insufficient consideration is where the consideration is too vague or insubstantial in nature to be enforceable.

    White v Bluett (1853)
    Bluett had issued a promissory note to his father. Upon his father’s death, his father’s executor, White, sued him on the note. Bluett argued that his father had agreed to discharge his liability in consideration of Bluett’s promise to cease complaining that he was overlooked in favour of his brothers. It was held that Bluett’s promise was nothing more than a promise “not to bore his father” that was too vague and was insufficient consideration for the alleged discharged by his father.

U.S. v. Microsoft: The Inside Story of the Landmark Case(d) Intention to Create Legal Relations

Where parties have not expressly denied an intention to create legal relations, what matters is not what parties had in their minds, but the inferences that reasonable people would draw from their words or conduct.

  • Social and Domestic Agreements
    It covers situations where the agreement is made between friends or between family members whereby there is a presumption that legal relations are not intended.

    Merritt v Merritt (1970)
    A husband left his wife and when pressed by her, indicated that if she would pay the outstanding mortgage instalments, he would transfer the house into her name when all the payments had been made. It was held that there was a binding contract since the presumption that legal relations are not intended does not apply if husband and wife are separated or about to separate.

  • Commercial Agreements
    In the case of commercial agreements, there is a general presumption that there is the necessary intention to create legal relations. This presumption flows from the desire of the law to give efficacy to agreements made in a commercial context.

    Edwards v Skyways Ltd (1964)
    Skyways promised Edwards to an ex gratia payment should he terminate his services. He left his position with Skyways and claimed the ex gratia payment. The court held that, in this particular case, the general presumption of intention in commercial agreements is not rebutted by the use of the phrase ex gratia to describe the payment. Skyways was legally bound to make the payment.