A contract is an agreement between two or more parties

Contracts are a fundamental component of civil law. When many people think of contracts they imagine long and wordy legal documents, containing lots of conditions and clauses – such as the contract one signs when buying a house or starting a job. The legal definition of a contract is much broader. A contract is an agreement between two parties that is considered enforceable by law. Contracts involve an exchange of promises – in other words, an expectation that each party will give something to the other. People enter into contracts regularly: most of them are  simple, informal and unwritten, such as the purchase of small items from a shop or a cafe. Other contracts are more significant and involve greater procedure. The law requires that certain contracts, such as insurance policies, employment contracts and the sale of land or vehicles – must be in writing, signed by both parties and sometimes witnessed by a third party.

There are six conditions or requirements for the law to consider a contract to be valid and legally binding:

Agreement. This is the negotiation of a contract and it is separated into two parts: offer and acceptance. The offer promises to supply other parties with something if they accept the contract. An offer can be made either to a specific individual (for example, to a householder by a door-to-door salesman or a telemarketer) or to an audience (such as an advertisement or a reward poster). Acceptance occurs when a party communicates their willingness to accept the offer, at a price or with conditions agreeable to both parties. At this point a contract is formed – provided it also meets the other requirements below.

Consideration. One party must provide something in exchange for something from the other party. Giving or promising a gift does not constitute a contract, since there is no item promised in exchange. If your parents promise you a car for your 18th birthday but fail to provide it, you cannot sue because you offered no consideration on your part. In the snail-in-the-bottle case of Donoghue v. Stevenson, the plaintiff Ms Donoghue was not able to sue the soft-drink manufacturer or the retailer for breach of contract – because she was given the drink by a friend, she had tendered no payment (consideration) and had therefore not entered into a contract. Donoghue instead made her claim based on the civil law tort of negligence.

Intention. Both parties must intend to be bound by the contract – in other words, they must plan to adhere to ‘their part of the bargain’. In some contractual disputes parties may claim they never intended this. These situations often occur in agreements between family members or close friends, and especially between husbands and wives. In Balfour v. Balfour (1919) a court ruled that a husband’s promise to send his wife 30 pounds a month was unenforceable under law because his wife had promised nothing in return. However in the similar case of Merritt v. Merritt (1970) the husband and wife, who were separated, had drafted and signed a written agreement. The court therefore ruled that their contract was legally binding. For these reasons it is safest to form written agreements with entering into contracts with family members and close friends, to clearly show offer, acceptance and conditions.

Capacity. Both parties must have the intelligence and competence to understand the contract they are agreeing to. The law considers that some groups may lack the capacity to enter into certain types of contract. These groups include people with an intellectual impairment or disability and elderly people affected by dementia or memory loss. Some contracts, such as the sale of tobacco and alcohol, mobile phone plans and credit card contracts, are restricted to minors (people under the age of 18). In the case of mobile phone contracts, for example, minors may require a parent or other adult to sign as guarantor. If a court or tribunal finds that one party lacked capacity, it will probably declare the contract to be invalid. If one party exploits the other party’s lack of capacity – such as a tradesman convincing a senile elderly person to agree to unnecessary work – then this is deemed to be unconscionable conduct.

Genuine consent. Both parties must have agreed to the contract of their own free will, based upon an accurate understanding of the contract and without coercion or intimidation. If one party has used unconscionable conduct or duress to pressure the other party into acceptance then the contract may be declared void. There may also be a lack of genuine consent if one party has misrepresented themselves and/or the terms of the contract. In Petelin v. Cullen (1975) Petelin, who could not read English, mistakenly signed a document that authorised the sale of his property; the court ruled he had not given genuine consent. In Allcard v. Skinner (1887) a court ruled that a nun who donated her property to a religious order had done so because of undue influence from the order’s ‘mother superior’.

Legality. All parts of the contract must be legal. An agreement to buy or sell illicit drugs, stolen property or dangerous weapons, for example, would not constitute a binding contract. Agreements that involve criminal activity (for example, the hiring of a ‘hitman’), torts or fraudulent conduct are invalid as contracts. In Parkinson v College of Ambulance Ltd (1925), Parkinson donated a large sum of money to a charity after being told that it would secure him a knighthood; Parkinson sued for breach of contract, however the court ruled against the legality of this contract. In Mahmoud v Ispahani (1921) the contract – a purchase of linseed oil – was declared void because the sale of linseed oil required a license – which the seller did not possess.

If a court determines that a contract has existed and that both parties were legally bound by this contract, it will then decide if one party has breached the contract by failing to honour their agreement. There are different types of contract breaches, ranging from partial and immaterial (less serious) to material or fundamental breaches (more serious). Most contract breaches are rectified with an order for damages; the amount will depend on the severity of the breach and injury or losses incurred by the plaintiff.

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