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Formation of A Contract: Back To Basics

FORMATION OF CONTRACTS

Introduction

In commercial transactions, legal relationships are invariably based on an arrangement between two or more parties whose corresponding promises enable them to behave per their respective obligations. A serious agreement between them constitutes a contract in which they gain law-enforceable rights. If legitimately made, a contract must fulfill certain basic legal requirements for the rights and obligations created thereunder to be enforced. A contract is enforceable by any party only if all the basic elements necessary to its validity are fulfilled.

ACCEPTANCE

Contractual obligations are initiated by one of the parties extending an offer to another and if the other party subsequently accepts it by its terms is acceptance. This is the external manifestation of assent by the offeree. Acceptance must be communicated to the offeror; if the offeree is unaware of the offer’s acceptance, he cannot be said to accept it. Acceptance can take any form; that is, it can be oral or written. However, it must be communicated to the offeror in the prescribed method, if any. The acceptance must be unconditional and unqualified. (Elliott & Quinn, n.d.)

COUNTER OFFER

This is the variation or modification of the offer’s terms by the offeree whose legal impact is to terminate the initial offer as was decided in Hyde v Wrench (1840). It is the offer’s conditional acceptance when the offeree imposes new conditions that were not present during the offering process.

DIVISIBLE CONTRACT

In these contracts, the parties performance are divided into matching pairs of duty; each part can be discharged separately, and so can the performance be enforced separately. It was used in deciding Taylor v Webb (1937), where premises had to be leased to a tenant for rent. There was a term in the lease that required the landlord to keep the premises in a habitable state: regular repairs. Premises were leased to a tenant for rent. The landlord declined to repair the property if the occupant then refused to pay the rent. In the landlord’s action, the court held that the lease had divisible responsibilities to rent the premises and repair and maintenance. The contract was thus not entire, and the tenant could not legitimately refuse payment.

FIRM OFFER

This is a statutory regulation meant to ensure that an offeror does not revoke an offer before the expiry date. A firm offer can thus be implied to be an offer that has timeline limits that should not be breached; thus, the offer will be held to stand for the entire period of the decision-making process.

OFFER

It is an unequivocal manifestation by one party of its intention to contract with another. A person making an offer is called an offeror. The person to whom the offer is made and who thus can accept it is called the offeree. (Turner, 2014).

OUTPUT CONTRACT

This is an agreement that usually arises in the sale and purchase of goods agreements. In this type of agreement, the buyer who is the offeree agrees to buy the offeror’s entire output, who is the seller.

REQUIREMENT CONTRACT

In this type of contract, the offeror and offeree make an express agreement that the offeree will purchase all the goods from the offeror. The buyer will be supplied with the number of goods they need, and in turn, they should exclusively continue to buy from the buyer only.

 

  • OFFER AND ACCEPTANCE

A contract comes into existence when another unequivocally accepts an offer by one party. An offer may be described as a proposal that, if accepted by another according to its terms, will create a binding agreement (Crawford, 1994). The offeror must have made a firm and definite offer to the offeree, who should accept it unconditionally. The elements of an offer are: An offer must be communicated to the offeree, the power of acceptance lies with the offeree, and the offeror must be willing to be bound by the terms of the offer. There must be an offer and a corresponding acceptance for the agreement to be binding in the long run.

An acceptance is an external manifestation by the offeree to be bound by the terms of the offeree. The tenets of acceptance are that it must: be communicated to the offeror, comply with the terms of the offer relating to the prescribed manner and method of acceptance, not vary or differ to the terms of the offer as prescribed in the offer a variation would result to a counteroffer; rejection of the offer and it must occur while the offer is still in effect, that is, within the stipulated time if any or within a reasonable time failing which it lapses.

For a contract to be formed, the parties must have mutually assented to the contract’s agreement; that is, both parties should have the same intention to be bound by the contract and its exclusive terms. The mutual assent is not dictated by what each party subjectively intended but by what a reasonable person in the first party’s position would have thought the first party was intending to mean based on the first party’s action and agreement.

Small businesses like big businesses rely on contracts to ensure the smooth running of the businesses. The customer-client relations are the business’s blood, so to achieve efficacy in a business, there should be cordial and harmonious relations between the two. A contract clearly states the parties’ expectations to the agreement; thus, it protects both parties if the expectations are breached. The parties can also review the contract in case of any confusion on either party to the contract. Contracts help reduce unexpected resources; they are economical since the parties will only fulfill obligations as per the contract, and thus no further expenses will be used. Contracts are important in budgeting since they help one to calculate projected revenue accurately. This will help the proprietor to allocate resources equitably. Contracts enhance professionalism in the business since all parties can know what is expected of them; thus, it provides a demarcation between friendship and business.

  • Online Contracts

Online contracts are agreements that are designed and assented over the internet. Most of these contracts are in a written form, and the offeree is expected to ‘agree’ to the terms provided contractual terms. These contracts are legally binding since the essential elements have been provided, and the offeree has been allowed to decide whether they accept or refuse to be bound by those terms. There are exceptions for provisions of these contracts, for instance, an adhesion contract. This is a contract whereby one party has more power in the contract, and thus the other party has no negotiation powers; they either agree to the terms or refuse the offer. Some of the common clauses in this contract are Indemnification, waiver of a right to jury or arbitration, waiver of claims, waiver of privacy rights, and in some cases, penalty clauses if one does a negative review of the company.

These contracts are legally binding, and it does not matter whether the offeree did not understand his actions of agreeing to the contract. The only remedy available to this type of contract is by requesting the legislature to review the contracts if one feels they are injurious to his/her state of mind.

  • (a) Case Problem 8 [Cantu v. Central Education Agency, 884 S.W.2d 563 (Tex. App.)]

The issues are

  1. Whether her resignation decision was legally binding in the effect of ending a contract?
  2. Whether the authorization to accept by mail may be implied only when the offer is delivered by mail?

Rule

An offer is a statement of intent by the offeror to be legally bound by the offer’s terms if it is accepted, and the contract exists once acceptance has taken place. Discharge of a contract may take any form provided it is legal; some of the ways of rescinding a contract include; discharge by performance, discharge by express agreement, discharge by a breach, and lapse of time.

Application

The claimant Maria Cantu had made an express decision to end the contractual relationship between her and the employee. This was affirmed by her resignation letter; at law, the parties to a contract are masters of the contract. Thus, they are endowed with powers to not only create a contract but also to end one. Her decision to send the resignation letter amounts to an offer, and it had no exclusion clauses or conditions. Thus, the superintended had not erred in law by accepting her resignation decision and was therefore legally binding. The resignation had further not specified how it should be replied to or accepted. The superintended as any reasonable person would have replied accepting the resignation through mail services since it was convenient in that she also used it.

Decision

Her resignation was thus upheld, and her decision to reverse it was not legally binding.

 

(b.) Case Problem 5 [McLaughlin v. Heikkila]

The issue in the case was:

  1. Whether there existed a contract to convey real estates between the parties

Rule

The statute governs a contract for the sale of land, and the prescription that it must be by writing must be adhered to to ensure that a contract indeed exists. Thus the offer and acceptance arising from this type of contract should take the form prescribed by law.

APPLICATION

McLaughlin argued that they had an oral agreement with the plaintiff. From this, they also argue that the plaintiff’s oral acceptance is also legally binding, and on this, they rely on; they rely on Schwinn v. Griffith, 303 N.W.2d 258, 262-63 (Minn.1981). Reliance on this case was, however, wrong since a written offer was not proof of a complete contract, and thus, a written acceptance would be needed to suffice the legal requirements of the contract. Therefore the claimants could only claim a contract existed if there was a written acceptance of the terms proposed in the contract.

Decision

There were no contractual obligations between the two parties due to a lack of the elements of a contract of that nature.

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