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Law Thoughts: elements of contracts

Every day, people enter into contracts – whether realising it or not. It may be something large, such as purchasing a house but equally, going to the shop to buy milk forms a contract.

Most people are aware that contracts are formed when an offer is made and that offer is accepted but, for a contract to be valid in law, other requirements need to be met. In most circumstances, there needs to be the following:

  1. An offer: a proposal is made that is capable of being accepted
  2. Acceptance of that offer: a clear agreement to accept the proposal is made
  3. Consideration: both parties to the contract need to give something of value to the other
  4. Contractual intent: both parties need to have intended to enter the contract
  5. Capacity: both parties must have legal capacity to enter into a contract
  6. Legality: the purpose or subject matter of the contract must not be illegal

If a contract cannot satisfy all of the above elements, it’s likely a court will find that no valid contract exists. For example, a contract to pay money to a child in exchange for household work won’t be valid if the child is below the age to have legal capacity, even if the child agrees to it! Likewise, an agreement with an adult to rob a bank won’t be valid as it will fail the legality requirement.

Rules of valid contracts

The rules and requirements for a valid contract come from common law rather than statutes, meaning previous decisions from the courts dictate what is and isn’t allowed. Decisions made in cases over a hundred years ago are still valid today and will continue to be, unless or until a court changes that in a future case. As a result, there are lots of interesting cases where the courts have had to decide if all of the requirements of a contract have been met.

One such case is Sidway Hall Estate [1877] 37 LT 457. In this case, an uncle offered his nephew an amount of money if he refrained from smoking, drinking, swearing and gambling until he turned 21. The nephew accepted this offer and fulfilled the agreement but, shortly before his uncle could pay him the money, he died; his estate refused to pay and argued the nephew hadn’t given consideration in exchange for the money. The court disagreed and found that refraining from doing something lawfully permitted is valid consideration.

There is some legislation that provides guidance, such as the Unfair Contract Terms Act 1977, which states terms of contracts that are not allowed, such as excluding liability for death. It also gives guidance on terms that will likely be found unfair, even if both parties agreed to it at the time.

Due to the hundreds of years of ever-changing case law, deciding what is and isn’t a valid contract is not always straightforward. Deciding if one of the parties has breached the contract and what you can do about it can therefore be difficult.

If you need advice on this, our Contract Resolution team will be happy to assist.

#lawthoughts

Posted on May 10th, 2019 by Lyons Davidson