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Forming a Contract

Contracts help people exchange goods and services in the marketplace. They are about promises that people make to perform certain actions; but they differ from ordinary promises in that contracts can be enforced in court.

Classifying Contracts

Most contracts are bilateral contracts, that is, both parties promise to do something for each other. Some contracts can also involve promises not to do something. For example, a dentist selling a practice might agree not to set up a new practice in the same neighbourhood for 10 years.

An oral contract is an agreement entered into verbally by the parties involve. In a written contract, the terms of the agreement are recorded on paper. The advantage of a written contract is that it usually provides clear evidence of what the parties agreed to, making it easier for the courts to enforce.

In an implied contract, both parties indicate their intention to enter into a contract through their conduct although no words may be spoken. For example, you drop a ticket into a fare box and in exchange receive a bus ride. On the other hand, in an express contract, the parties discuss in advance what each of them will do. A contract under seal is a written contract such as a deed that needs a red sticker or dot placed beside the signature.

Elements of a Contract

A contract is formed only if the parties intend to be legally bound by their promises and have clearly agreed on what those promises are. This is known as a meeting of the minds. The court will look for certain elements to determine whether a valid contract has been made. These are offer, acceptance, and consideration.

An offer is a clear proposal to another party to enter into an agreement on certain terms. The person who makes the offer is called the offeror; the offeree is the party who receives the offer. For an offer to be valid, it must be intended seriously and its terms must be certain. An offer is not an offer until it has been communicated to the party for whom it is intended by mail, courier, fax, e-mail, or in person. The offer lapses if it is not accepted before the date set out in the offer. In most cases, an offer can also be withdrawn or revoked by the offeror before it has been accepted by the offeree. Sometimes, the offeree may respond with alternative terms, or a counteroffer.

Acceptance means that the offeree agrees to make a contract on the offeror’s terms. Generally speaking, the acceptance of an agreement takes effect once it is communicated to the offeror. Acceptance is usually communicated in the same way that the offer was communicated except when the offeror has expressly stipulated otherwise.

Consideration, the third essential element of an enforceable contract, is the benefit, such as money or property, that each party to the contract receives from the other. If money is exchanged when the contract is formed, this is known as present consideration. Future consideration occurs when one or both of the parties promise to perform some part of the contract in the future. Past consideration, which is a benefit conferred when an act has already been performed, cannot be used to create a contract.

Invalidating Factors

Why do people often end up in court disputing their contracts? Many factors can cause the court to rule that a contract either does not exist, or exists but is unenforceable. These factors include incapacity, illegality, public policy, mistake, misrepresentation, duress, undue influence, and unconscionability.

A contract cannot be formed if one of the parties does not have the capacity to understand what they are getting into and the ability to perform the contract. While adults are free to enter into any contract they wish, minors and adults with impaired mental ability receive special treatment under contract law. People who are not mentally competent do not have the capacity to contract nor do persons who are intoxicated to the point that they obviously do not comprehend the terms of the contract. Minors can make contracts, but most adults will not contract with them because the contracts are usually unenforceable in court. Minors are bound by contracts for the purchase of necessaries such as food, clothing, and shelter. However, these contracts must be fair to the young person. Parents are not liable if their minor children fail to pay for goods that are not considered necessaries.

An enforceable contract must be formed for a legal purpose, and the consideration given must also be legal. In the case of an illegal contract, the courts will simply declare the contract void and refuse to have any further dealings with the parties. This is also true of agreements that are contrary to public policy, that is, against the morals and ethics of the community.

Also, a contract cannot be formed if one or both parties have made a mistake, or error, about an important aspect of the contract. Often the courts say the mistake must go to the root of the contract or concern a material or fundamental term. Mistakes are classified as common mistake (both parties make the same mistake); mutual mistake (both parties are mistaken but they make different mistakes); and unilateral mistake (one party is mistaken and the other party may or may not know it).

Misrepresentation means that one party has made a false or inaccurate statement of fact that causes the other party to enter into a contract. A buyer who relied on the misrepresentation could go to court and ask that the contract be declared void on the grounds that no genuine consent actually existed. Contracts can also be voided if duress, unlawful force or pressure, is used to convince a person to enter into it. A situation of undue influence exists when there is a special relationship between the contracting parties that creates a power imbalance so that it impossible for the subordinate or less powerful party to freely give consent. Unconscionability is similar in that it involves a contract between a weak and a strong party in which the bargain is unreasonably weighted in favour of the strong. Both undue influence and unconsciounability render a contract void.

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