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Shamim Tazikeh -1403.University of Parand

 The Formation of Contracts

A contract is an agreement which the law will enforce. It is at least

an agreement . There are other requirements too . It is sometimes
said “ all contracts are agreements but all agreements are not
contracts “ . A contract consists of five basic elements. The two
most basic ones offer and acceptance, form the agreement . In
addition , both parties must contribute something to the bargain.
This contribution (e.g. money , work , goods) has the special name
of consideration . Unless a promise is put into a deed it will not be
binding upon the person who made it (called the promisor) unless
the other party (the promisee) has also contributed to the bargain
(provided consideration) . Thus. “ I promise to deliver “ is not
binding on me , but “ I promise to deliver in return for your promise
to pay “ probably would be.

So offer, acceptance, and consideration are three of the essential

ingredients . Further to these the parties must intend the sort of to

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make bargain which has legal overtones; they must intend to be
legally bound.

The fifth requirement is that both parties must be able to make

contracts. The law protects the weak and the infirm, those of less
than full contractual capacity, the drunk, those under the influence
of drugs and young.

Offer and Invitation to Treat

An offer is a statement to the person making it is willing the effect
that to contract on the terms stated , as soon as these accepted by
the person to whom the statement is addressed . The person
making the statement is called the offeror; the person to whom it is
made is called the offeree or (if accepts the offer) the acceptor .
The offer may be made either expressly (in so many word) or by
conduct ; it may be made to an individual , or to a group of persons
or the public at large .

 Offers
The party making the offer is called the offeror; the party to whom
it is made is called the offeree . An offer is a statement of the terms
by which the offeror is prepared to be bound . If an offer is accepted
then the agreement exists . If the other three elements are present,
a contract exists. Then the person who offered to buy and the
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person who agreed to sell are bound . If either fails to do as he
promised it might amount to a breach of contract.

When an offer accepted an agreement ( and perhaps a contract) is

made . If it remains unaccepted it will not last for ever. There are various
ways in which an offer might be brought to an end:

Revocation
This is the withdrawal of the offer by the offeror . Provided that
revocation is effectively communicated to the offree-by the offeror
or a reliable third party – and provided this is done before
acceptance then the offer is revoked . it no longer exists to be
accepted.

Counter – Offers
If an offer is answered with another offer then the first offer is
destroyed.

Lapse of Time
Obviously , if an offer is open for a fixed time it lapses afterwards .
If it is not , then it lapses after a reasonable time , and this depends
on circumstances .

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Delays
There have been cases which involve delays between offer and
acceptance during which the goods involved have been damaged.
The offer lapsed then.

Death
The general rule is that the death of either offeror or offeree
terminates negotiations. If the subject matter doesn’t involve the
dead party’s personal activity - if his executors could carry out the
deal - and if the offeree had not heard of the death when he
accepted, then a contract might be made.

 Acceptance
Assuming that an offer has been made , a contract comes into
existence when the offer is accepted . To accept an offer , the
offeree must express his assent to the terms of the offer . He may
do so either expressly (by words if acceptance) or by conduct . In
most cases , acceptance will involve two elements . The offeree
will agree not only to receive the performance which is to be
rendered by the offeror , but also to render the counter performance
which the offeror requires of him . The contract is then said to be a
bilateral one , that is , one under which each party undertakes

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obligations: for example , one party agrees to deliver goods and
the other to accept and to pay for them .

 consideration
consideration is the point of making the bargain. It is what you
wanted to get out it. If you do not receive it (if the consideration
fails) then it usually amounts to a breach of contract.

The basic notion of consideration is that of reciprocity : that a

promisee should not be able to enforce the promise , unless he has
given (or promised to give ) , or unless the promisor has obtained
(or been promised) something in exchange for it . This idea
underlies the often repeated judicial definition that consideration is
a benefit to promisor , or a detriment to the promisee . Only one
limb of the definition needs to be satisfied: if there is a detriment to
promise there is a contract even though there is no benefit to the
promisor , and conversely . Of course in the vast majority of cases
the detriment to the promisee (e.g. parting with goods under a
contract of sale will also be the benefit to the promisor ( i.e. receipt
of the same goods).

Where a contract is a bilateral one , each party will give and receive
a promise . In such a case , it is the consideration for each promise

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that is under discussion : it is confusing and wrong to think of the
consideration for the contract . Thus in the case of a contract for
sale of goods , the consideration for buyer’s promise to pay is the
seller’s promise to deliver the goods , or their actual delivery

Form
We have already seen (p.97) that unless contracts are valid, they
may be classified as either void, voidable, or unenforceable. A void
contract is entirely without legal effect, does not give rise to any
legal rights and duties, and is, in fact, no contract at all. A voidable
contract is one which may be repudiated at the will of one of the
parties, but until it is repudiated it remains valid and binding. It is
affected by a flaw (e.g. fraud, innocent misrepresentation, undue
influence or duress), and the presence of any one of these defects
enables the person adversely affected to take steps to set the
contract aside, subject to the interests of an innocent third
Unenforceable contracts are neither void nor voidable, but they
cannot be enforced in the courts because they lack some item of
evidence essential to a valid contract. Some contracts must be
made by deed, some must be in writing, and some must be
evidenced by writing. Unless the writing (in the form laid down by
law) is available, the courts will not lend their aid to the enforcement
of the agreements. So they are stated to be unenforceable, but it

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does not mean that they are invalid. The purpose of these formal
requirements is to achieve certainty and thus avoid disputes arising
in the transfer of ownership or possession or rights in various kinds
of property.
Contracts which must be by deed. The following must be by
deed, otherwise the transaction is invalid:
(a) Contracts not supported by valuable consideration, e.g.
promises of gifts.
(b) Leases of land for more than three years (Law of Property Act,
1925)
Contracts which must be in writing. The following must be in
writing, a requirement laid down by statute in each case :
(a) Bills of exchange, cheques and promissory notes (Bills of
Exchange act , 1882).
Contracts of Guarantee. Under section 4 of the Statute of Frauds,
1677, as amended by the Law Reform (Enforcement of Contracts)
Act, 1954, 'any special promise to answer for the debt, default or
miscarriage of another person' is required to be evidenced by
writing. Section 4 applies to contracts of guarantee, by which we
mean the undertaking by one person to be responsible to another
(e.g. a creditor) for the debt or wrongful action (tort) of a third party.
For example, let us suppose that you and I enter a shop in which
you want to make a purchase. The shopkeeper may not wish to sell

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the goods to you unless you have a guarantor, i.e. a person who
will undertake to pay for the goods if you default in payment. I
inform the shopkeeper that I will pay for the goods if you do not (or
are unable to) pay. This is a guarantee. You are primarily liable on
the contract, while I am secondarily liable in the event of your
default. The shopkeeper should ensure that some document (the
'note or memorandum') is completed, and signed by me as
guarantor signifying the agreement .
A contract of guarantee must be distinguished from an indemnity.
Thus, if you and I go into a shop and I say to the shopkeeper: 'Let
him have the goods, I will ensure you are paid' (or 'I will pay for
them'), I am indemnifying the shopkeeper against loss on the
contract. I am primarily liable on the contract, and may be sued by
the creditor. Such is not a guarantee; it is an indemnity, and no
writing is required to evidence the agreement.

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