Business Law – Lecture 5 – 19/08/2013
Three requirements of a contract:
A contract is a legally enforceable agreement. Most contracts do not need to be in writing, many
contracts are made verbally and some contracts are implied by the conduct of the parties. Some
contracts are formed and performed at the same time; with other contracts one or both of the parties
make a promise and therefore have an ongoing obligation once the agreement has been formed.
Agreement + Intention + Consideration = Contract
An agreement is a meeting of minds and exists when two or more people share understanding and
intention. Many agreements are preceded by a period of negotiations. Sometimes the existence of a
finalised agreement can be deduced from the conduct of the parties. At other times, the existence of a
finalised agreement is less clear.
Offer + Acceptance = Agreement
A person makes an offer when they express a willingness to immediately enter into a contract with the
offeree, the person to whom the offer is directed. An offer can be made to one person, many people, or
‘the world at large’.
An offer can be:
- Accepted by the offeree,
- Rejected by the offeree, or
- Revoked by the offeror.
The offeror is entitled to revoke their offer even if they have promised to keep the offer open for a
particular period, unless the offeree has paid for the offeror’s promise to keep the offer open, e.g.
paying a deposit.
An advertisement is usually not an offer; instead it is an invitation to treat – an expression of willingness
to consider offers.
When the offeree indicates by words or by action that they are willing to immediately enter into a
legally enforceable contract with the offeror on the terms offered, they are said to accept the offer.
Only the offeree can accept the offer and acceptance must be unqualified otherwise it is a counter-
Acceptance must be communicated to the offeror, the offeror can waive the requirement that
acceptance be communicated e.g. ‘reward’ contracts. 2. INTENTION
The parties to the agreement must intend the agreement to be legally enforceable. In deciding whether
or not the second requirement is satisfied, the court looks at the conduct of the parties from the
perspective of an objective observer and asks whether the parties were behaving in a way that indicated
that they intended the agreement to be legally enforceable.
In applying the objective test, the courts have traditionally made two important presumptions:
- If the agreement was made in a social or domestic context, the court will presume that the
agreement was not intended to be legally enforceable
- If the agreement is made in a commercial or business context, the court will presume that it was
intended to be legally enforceable
An agreement is not a contract unless both parties to the agreement have paid, or promised to pay, a
price called consideration. Consideration can take the from of:
- The payment of money
- The provision of goods
- The provision of a service
- The undertaking of an onerous obligation
- Refraining from doing something, such as agreeing not to sue, or
- A promise to do any of these things
Consideration must be adequate and sufficient, it must not be:
- A vague promise
- Past consideration, or
- Performance of a prior legal obligation
According to the rule in Foakes v Beer, part payment of a debt is not sufficient consideration for a
promise by the creditor to waive payment of the balance of the debt.
If the creditor promises to waive the balance of