Law of Contract
Rules in the Formation of a Valid Contract
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Introduction
A contract is defined by Sir as “a promise or set of promises which the law will enforce”[1]. There are several essential elements to a valid contract. First is agreement or a meeting of the minds of the parties to the agreement when one party makes an offer and the other party accepts that offer. Second is the giving of consideration or the giving of a bilateral or unilateral promise. Third is existence of a clear intention to create a legal relationship placing upon the parties their corresponding obligations enforceable under the law. Fourth is the form of the contract since there are contracts such as the sale of real property that are required by law to be made in writing for the agreement to have a binding force. Fifth is capacity of the parties to enter into a contract so that there is no impediment to the giving of a free willing or voluntary consent. Sixth is consent or freely given agreement to the terms of the contract so that contract formation is not made ineffective by the presence of undue influence or duress. Seventh is the legal purpose of the contract so that agreement should neither be illegal nor contrary to public policies. [2] Since these elements are essential, all should be present in the formation of a contract. Otherwise the resulting agreement may be rendered by the court as void, voidable or unenforceable.[3] A contract creates rights between the parties exercised with the corresponding remedies for violations.
Legal Issues
The legal issues arising from the case involves: 1) the determination of the formation of a valid contract between George and Allan for the sale of the moped by George to Allan as well as the corresponding rights and remedies available to the parties due to the incidents surrounding the moped after the sales transaction and 2) the determination of the formation of a valid contract between Allan and Charlotte when Allan promised to pay Charlotte money for the temporary repair of the moped and the legal standing and remedies available to the parties involved.
Contractual Relations between George & Allan
The formation of a valid contract involves the process of exchanging offers and until there is a final offer made by one party and accepted by the party. On one hand, an offer refers to the expression of readiness to enter into a contract coupled with the intention of making the contract binding upon both parties as soon as a valid offer is made by the offeror and duly accepted by the offeree. On the other hand, an acceptance pertains to the final and unqualified acquiescence to the terms contained in the offer. For the acceptance to be valid, this should cover all the terms of the contract. The making of an offer and the corresponding acceptance of the same offer should be made by the parties with the intention of creating legal relations. [4]
In business dealings there is a presumption that the parties intended the creation of legal relations in concluding the contract. Since this is only a presumption, any party claiming otherwise may show proof rebutting the presumption such as through the inclusion of any express statement stating the lack of intention to enter into the agreement.[5]
In the given case, George made the offer for the sale of his second hand moped for ,200 to Allan, who in turn, accepted the offer. There was a clear intention between the parties to enter into a legal sales agreement since there was no indication to the contrary. There were no statements or previous and succeeding actions from George or Allan that would defeat the formation of a valid contract.
However, despite the formation of a valid contract, there are certain factors that may vitiate the agreement such as 1) misrepresentation, 2) mistake, 3) duress, 4) undue influence, and 5) illegality. Depending upon which of these vitiating factors have intervened in the contract would make the agreement void, voidable or unenforceable resulting to different remedies. Misrepresentation refers to the false statement of fact communicated by one party to other and even if the false statement does not form part of the contract, the statement served as an inducement for the other party to enter into the contract. This has the effect of making the contract voidable. Mistake refers to an error occurring in the formation of the contract that if classified as an operative mistake makes the contract void. Duress exists in a situation where a party is forced to enter into the contract in which case the agreement becomes voidable. Undue influence pertains to the situation where an agreement occurs due to the improper pressure brought down upon a party to the contract so that the contract becomes voidable. Illegality refers to the subject of the contract that is against the law making the contract void. [6]
In the given case, the vitiating factor that intervened in the contractual relations of George and Allan is misrepresentation. Two elements of misrepresentation exist, which are 1) the presence of a false statement of fact and 2) the misrepresentation worked to induce the formation of the contract. There is misrepresentation because during the delivery of the offer, George gave the statement that the moped had only run for 10,000 miles when in fact the moped already had more than 20,000 in mileage. This was also followed by the statement that if Allan does not believe in George’s claim, that Allan should check with Gary at the motor shop who would back-up his statement. From the facts of the case, although Allan did not check with Gary, it can be implied that his acceptance of the offer was influenced by the claim made by George. Because of the existence of misrepresentation, the contract of sale between George and Allan becomes voidable.
A voidable contract means that a party to a contract has the right to choose to avoid or rescind the binding legal consequences of the contract or the right to ratify the legal obligations arising from the contract with the effect of extinguishing the right of avoidance. A voidable contract is characterized as operational in all its aspects much like a valid contract until such time that a party with the power to avoid or rescind the contract actually conducts steps to avoid the agreement. In the case of actual avoidance made by a party to the contract, the goods obtained under the agreement should be returned if this is possible but if the goods have been resold prior to the actual avoidance, the owner will not be able to exercise claim over the good. [7] This means that in case certain vitiating factors arise in the compliance with the obligations arising from the contract, the party with the power to rescind the contract may either avoid the contract or ratify it.
Since the contract between George and Allan has become voidable, Allan who is the party with the power to rescind the contract has the option to either avoid the agreement or ratify the sales agreement after learning that George made a misrepresentation of the mileage of the moped at the time of sale. On one hand, rescinding the contract means that the parties reverts back to their position prior to the creation of the contract[8] so that Allan returns the moped to George and the latter returns the purchase price. On the other hand, ratifying the contract after learning of the misrepresentation means that Allan is willing to confirm the validity of the contract.
Rescission is made by the injured party by communicating the intention to rescind the contract to the other party. However, in some instances where there are indications of repudiation such as informing authorities of the intention to rescind the contract constitutes a valid rescission[9]. Section 2 of the Misrepresentation Act 1967 provides that the injured party has these remedies: 1) rescission, 2) damages, and 3) indemnity or a combination of these three depending upon the nature of misrepresentation.
However, despite the right of the party with the power to rescind or avoid the contract, there are certain bars to rescission. First is the affirmation by the injured party of the contract after having complete knowledge of the misrepresentation and the concurrent right to rescind the contract[10]. Second is the lapse of time without the injured party taking any action to rescind the agreement[11]. Third is restitution in integrum impossible or the situation where it is impossible to restore the parties to their original situation prior to the contract so that the right to rescind is lost[12]. However, precise restoration is not called for and the remedy still persists provided that there is still substantial restoration. Even if the property subject of the contract has already deteriorated, this would not bar the exercise of rescission provided the restoration is still substantial.[13] Fourth is the acquisition of a third party, in good faith and in exchange for value, of the property[14]. Lastly, the power to rescind the agreement may be lost in case the court exercises its discretion by awarding damages in place of rescission as provided in section 2(2) of the Misrepresentation Act 1967.
In the given case, Allan learned about the misrepresentation in mileage from the motor shop when something went wrong with the moped. However, after having the moped repaired, Allan decided to still use the moped to his trip to Cornwall and return the moped to George upon returning home. This instance may be considered allowing the lapse of time after learning of the misrepresentation before actually doing any explicit action to communicate the intention to rescind the contract. During Allan’s trip, the moped again broke down requiring Allan to get the aid of a passing motorist with a promise to pay for the temporary repair. Upon meeting with George, Allan communicated the problem about the moped. Instead of rescinding the contract, with the effect of Allan returning the moped and George the purchase price, Allan instead agreed to the sale of the moped in its temporarily repaired state for a lower price than the cost of purchase. Upon discovering that the moped was vandalized the purchase price agreed upon by the parties further decreased from ,000 to 0. The succeeding incidents covered the negotiations for the sale of the moped by Allan to George. The actions of Allan indicate that he has waived his right to rescind the contract. Allan’s engagement in the negotiations for the sale of the moped back t George implies that the initial sales contract has been ratified. Allan may be found by the court to have waived the right to rescission so that the remedy is no longer available to him.
In relation to the sale of the moped back to George, the determination of the formation of a valid contract depends upon whether there was a valid acceptance when George sent his letter of acceptance by mail but this was received by Allan one day after the latter has sent a communications cancelling the offer because he learned that the repair could be made at a lower price with the effect that he looses 0 dollars in the purchase price.
The general rule in contract law is that the letter of acceptance should be communicated to the offeror before the offeror cancels the offer in order to create a valid contract[15]. Exceptions to the rule are 1) carrying out of obligations in a unilateral contract constitutes acceptance, 2) waiver of the requirement of communication, and 3) the postal rule. The postal rule that applies to the given case pertains to a situation where acceptance by post is agreed upon by the parties or it is the appropriate mode of communication so that acceptance is deemed to have been given at the time that the letter of acceptance has been posted regardless of whether the letter is delayed, lost or destroyed en route that the letter fails to reach the offeror. [16]
In the given case, it appears that the letter of revocation of the offer sent by Allan is dated and was sent earlier than the letter of acceptance of George. This implies that the offer was revoked before acceptance. However, the rules of the revocation of an offer and acceptance by post need to be reconciled since effective acceptance by post becomes effective at the time of posting while the effective revocation requires communication to the offeree so that without communication the revocation becomes ineffective[17]. In the case of the revocation of the offer, the essential element is that the offeree is informed so that the revocation becomes effective at the time that this has been received by the offeree even if the letter of revocation was dated October 21, 2005. In the case of acceptance by post, this becomes effective at the time of posting or October 22, 2005. If George received the letter of revocation before October 22, 2005, then there was no effective acceptance but if the letter of revocation was received after the letter of acceptance was posted, then there is a valid acceptance.
Contractual Relations between Allan & Charlotte
One of the elements of a valid contract is the existence of consideration or the giving of a unilateral or bilateral promise. This means that the parties to the contract should promise to either give or do something for the other. A consideration may be executory if the exchange of promise covers future actions or executed if the act in exchange for the promise has already been accomplished. The existence of consideration may be determined when the party wanting to enforce the contract shows that consideration has been given. In particular, the promisee should be able to prove that consideration was provided by him/her so to support the contractual claims. [18]
Consideration is important to show that the parties equally benefit from the contract and there are no unfair relations between the parties such as when only one party gains from the performance of the obligations set out in the agreement. The importance of consideration is expressed in the case where Easton contracted with X covering the arrangement that in exchange for the work performed by X for Easton, Price would receive £19 as payment. X performed the work however Easton failed to pay Price. Price commenced suit against Easton. The court held that the claim of Price for £19 is not valid since he was not able to provide consideration. The decision of the court was based on the rationale that Price did not extend any consideration in exchange for the payment he is claiming from Easton since it was X who performed the work for Easton. [19]
The letter received by Allan from Charlotte reminding him of the promise he made to pay is based on the incident where Allan flagged down the car of Charlotte because Allan’s moped derailed on a deserted road. He promised Charlotte to do temporary repair on his moped. Since Charlotte is the party and promisee claiming for payment based on the promise made by Allan, she has to prove that she has given consideration to support the contractual claim. In her defence, Charlotte can claim that she has extended the consideration of doing temporary repair on Allan’s moped in exchange for payment. She can also state that Allan has noted her name and address indicating the intention to pay. If Charlotte is able to prove the existence of consideration then she may be awarded the amount being claimed from Allan and the latter may be ordered to pay Charlotte.
Conclusion
Contract law has been proven to be an inevitable legislative tool governing the transactions arising in various forms of human relations. This serves to provide guidelines in determining the formation of a valid contract and the ensuing rights and obligations accruing to the parties. In this way parties are informed of their rights and its limits as well as the legally binding remedies available to them in particular circumstances.
The formation of a valid contract follows the negotiations between parties through the making of an offer and the giving of acceptance to the same offer. However, the process is not as simple as it seems, especially when the parties have differing opinions over whether a contract was formed and the time of effectivity. A valid offer comprises an expression of willingness to engage in a contract while acceptance is the acquiescence to all the terms of the offer. Despite the existence of a valid offer and an effective acceptance, there are vitiating factors, such as misrepresentation, which could render the contract voidable and subject to the remedy of rescission as well as claim for damages or indemnity depending upon what the court deems appropriate.
Apart from this, the creation of legally binding agreements is also subject to compliance with essential elements, one of which is consideration. This element serves the purpose of ensuring that there is a fair exchange in the performance of the contract so that the parties to the contract should give in order to receive.
These aspects of contract law reflect and respect the fundamental rights of contracting parties, provide guides for various situations that may occur in the formation and implementation of contracts, and remedies available to the parties.
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