Essential Elements of a Binding Contract

1. Requirements of a binding contract

For an agreement between two parties to be a binding legal contract, there are certain requirements or elements of the contract formation that must be seen in the agreement. These requirements are: offer, acceptance, consideration, intention to be bound by the contract, capacity and consensus ad idem (Stone & Devenney, 2015).

Offer is made by one party to another signifying the offeror’s willingness to enter into a contract on specified terms. Acceptance is given by the other party to whom the offer is made and once acceptance is clearly and unequivocally given, both the parties are bound by the contract. Consideration is a quid pro quo which each party promises to do for the other party in reciprocation of something being done. Consensus ad idem requires that both the parties to the contract have the same understanding as to the terms of the contract. Intention to create legal relations is the parties’ intention to be legally bound by the terms of the contract. Capacity of the parties relate to the age of the parties and the mental condition of the parties at the time of entering into the contract. Therefore, contracting parties must be of sound mind and must have the age of majority.

2 (a) Implied terms with an example from statute

Implied Terms are those terms that are not expressed by the parties to the contract to have been made by them. A contract may nevertheless include such terms, although they are not expressed. The nature of the implied terms is such that the court may imply these into the contract because these are necessary terms in contracts of a certain kind, whether expressed or not. In the common law, many such terms are considered necessary enough to be implied unless expressly rejected by the parties. The common law for instance, recognizes certain implied terms in specific contracts such as tenancy agreements.

Such terms may also be implied as per the statutory provisions. For instance, both the Sale of Goods Act 1979 as well as the Consumer Rights Act 2015 provide certain implied terms (Stone & Devenney, 2015). Under the Sale of Goods Act 1979 the condition that goods must be fit for the purpose for which sold is an implied term of the contract of sale of goods. This term is in the nature of a condition. Therefore, failure to abide by the term by the seller can lead to the contract becoming voidable at the option of the buyer.

(b) Incorporation of term by notice or signature

Where the contract is an oral contract, incorporation of terms can be done by signature on a written document, which is signified to be incorporated into the oral contract; or by reasonable notice to the party (Poole, 2016, p. 206).

In oral contracts, a practical difficulty of ascertaining the terms that have been agreed to by the parties arises. In such cases, there may also be some written terms that may be alleged to have been incorporated into the oral contract. Where the terms of the oral contract are written in a document as contractual terms, and reasonable notice of the terms is given before or at the time of contract, such terms would be incorporated (Poole, 2016). Therefore, reasonable notice at the time of incorporation or before such time, is a prerequisite for such incorporation (Olley v Marlborough Hotel, [1949] 1 KB 532, 1949). In other words, reasonable steps must be taken to bring the term to the notice of the other party (Parker v South Eastern Railway Company, [1877] 2 CPD 416, 1877).

The effect of a signature on a written document would also be incorporation of the term and the parties are bound by the same, unless they show that there was a fraud or misrepresentation (L'Strange v E Gracoub, [1934] 2 KB 394, 1934).

(c) Non est factum. Is it binding?

Non est factum is a latin maxim, which literally translated means: “It is not my deed” (Poole, 2016, p. 117). This is applied in the contract law as a defence to a party who can successfully prove that at the time of signing the document, they were unaware as to the true meaning of the contract, therefore, now they are not bound by the contract (Poole, 2016).

The court has had to consider the continued validity of the rule of non est factum in the face of universal education, where it is difficult for a person to show that they did not know the true meaning of a document (Saunders v Anglia Building Society, [1971] AC 1004, 1971). In this case, the court observed that for a literate person in the modern world, it is difficult to succeed in the plea of non est factum. The defence is still applicable in cases where the transaction purported to be effected by the document is substantially or significantly different from the one intended (Saunders v Anglia Building Society, [1971] AC 1004, 1971). Therefore, although the plea of non est factum has limited effect today, it can still be applied in cases, provided the person making the plea can show that the transaction in the document and the one intended are not the same.

3. Breach of contract and remedy

Where a party does not perform the conditions of the contract, a breach of contract occurs and such a breach will give rise to legal remedies for the party which has suffered a breach. Remedies that are involved in a breach of contract include: damages, restitution, specific performance of contract

The purpose of awarding damages by a party is to compensate for the loss suffered by the innocent party provided that only those losses arising naturally from the breach of contract are recoverable (Hadley v Baxendale (1854) 9 Ex Ch 341 , 1854).

In cases where damages are inadequate remedy, the court may at its discretion provide the remedy of specific performance, except in cases of personal service to be performed (Cohen v Roche [1927] 1 KB 169 , 1927). Restitution seeks to place the party in the same position he was or would have been had the other party not breached the contract.

4. (a)Difference between condition and warranty

A condition is a fundamental term in the contract, which is essential to the performance of the contract. Conditions are usually decided before or at the time of the contract. It is not enough that the parties use the term ‘condition’ for the term to be a condition (Schuler V Wickman Tool Sales, (1974) AC 235 (HL, 1974). Although, the use of the word condition in the contract, may serve as an indication of the parties’ intent to treat it as a condition (L’estrange v Gracoub, (1934) 2 KB 394, 1934). The non-performance of the condition by one party will lead to the contract being voidable at the option of the other party. A warranty is not an essential term in the contract. If one party fails to perform a term which is in the nature of warranty, the other party may still continue to be bound by the contract.

(b) Secret remedy

Equitable remedies are granted by the court in situations where the legal remedy or the remedy of compensating the party will not be adequate relief for the party. In this case, Zanto Research and Forever You have an agreement by which the former will supply Youth Pill but this cannot now be done unless the active ingredient be disclosed to the US import regulations. Not doing so would mean that the import of the Youth Pill cannot be allowed. Therefore. Zanto research can be made to disclose the secret ingredient because it is essential to the performance of the contract.

5. Exclusion clause

The clause is an exclusion clause. Under the Unfair Contract Terms Act 1977 as well as the Consumer Rights Act 2015, exclusion and limitation clauses that exclude the liability for death or personal injury arising from negligence will not be valid. The CRA 2015, section 65(1) provides: “trader cannot by a term of a consumer contract or by a consumer notice exclude or restrict liability for death or personal injury resulting from negligence.” Therefore, exclusion clause is not valid.

6. Exclusion and limitation clause difference

Exclusion clause excludes the liability of the party to the contract but the limitation clause limits the liability to a specified sum. The Unfair Contract Terms Act 1977, section 11(4) provides the test for limitation clauses. This requires the court to test whether the person limiting the liability would have the resources to cover the liability should it arise and whether the person could have obtained insurance for the same (Poole, 2016, pp. 264-265).

Exclusion and limitation clauses are enforced by the judiciary provided that these clauses are not vitiated by some other factors. Therefore, these clauses have no effect where the breach is of a fundamental term of agreement (Karsales v Wallis, [1956] EWCA Civ 4, 1956). In general, exclusion clause must be an integral part of the contract (White v Blackmore, [1972] 3 WLR 296, 1972) and must be

displayed or informed prominently (Thornton v Shoe Lane Parking co., [1970] EWCA Civ 2, 1970).

Bibliography

• Cohen v Roche [1927] 1 KB 169 (1927).
• Hadley v Baxendale (1854) 9 Ex Ch 341 (1854).
• Karsales v Wallis, [1956] EWCA Civ 4 (1956).
• L'Strange v E Gracoub, [1934] 2 KB 394 (1934).
• Olley v Marlborough Hotel, [1949] 1 KB 532 (1949).
• Parker v South Eastern Railway Company, [1877] 2 CPD 416 (1877).
• Poole, J., 2016. Textbook on Contract Law. 13 ed. Oxford : Oxford University Press.
• Saunders v Anglia Building Society, [1971] AC 1004 (1971).
• Schuler V Wickman Tool Sales, (1974) AC 235 (HL (1974).
• Stone, R. & Devenney, J., 2015. The Modern Law of Contract. Oxon: Routledge.
• Thornton v Shoe Lane Parking co., [1970] EWCA Civ 2 (1970).
• White v Blackmore, [1972] 3 WLR 296 (1972).

Take a deeper dive into Equity and Trust LawClient Advice with our additional resources.