Forming a Contract
– the main elements of a contract
– the Doctrine of Promissory Estoppel and Genuine Assent
– a Contract of Adhesion
According to the law, only a person who is legally able has the power to make a binding contract.
This requirement intends to protect people from being taken advantage of who may not fully understand what they are doing due to age, mental disability or intoxication.
The mutual assent of the parties to a contract is also known as the “meeting of the minds” and it is manifested by both an “offer”and an “acceptance”:
i) Offer: the offer is a demonstration of the willingness of a party to enter into a bargain and is the first step in the traditional process of forming a valid contract. It is transmitted directly to the offeree by the offeror’s acts or words, whether spoken or written, through any medium.
• Sufficiently definite
• Communicated to the offeree
• Clearly indicating the offeror’s intent to make a contract
The expiration of an offer may be at the time specified by the offeror, or at an earlier time because of rejection, counter-offer, death, or incompetency of either party. Additionally, it may be revoked by the offeror at any time before its acceptance.
The acceptance must be:
• Clear and unqualified: if it modifies the offer, it is considered as a conditional acceptance that is treated as a counteroffer. A counteroffer corresponds to a rejection of the original offer and the making of a new one.
• Accepted in a manner required by the offer.
Contracts that are in violation of common or statutory law, or that are against public policy are generally held illegal and thus void and unenforceable by either party at common law. As a consequence, property or money transferred cannot be recovered. These include contracts:
• to commit a crime, a tort or a fraud;
• that are sexually immoral;
• that prejudice public safety; and
• to defraud revenue.
Consideration is based on the idea of “something for something” in exchange – some action, forbearance, or promise.
According to the bargain theory, the promise is given in a contract as part of a “bargain”. A party makes his/her promise to give up something of value in exchange for the other party’s giving of value.
• Promises to make gifts – it is mere gratuity from one party.
• Sham and nominal consideration – when consideration is so insignificant as to bear no relationship to the value of what is being exchanged.
• Illusory Promises – an agreement in which one party gives as consideration a promise that does not actually obligate him to anything under the contract. The mutual promises in a contract must be real.
• “Past consideration” – one party was already legally obligated to perform, e.g., promises to pay a pre-existing debt or promises to pay for services already received.
The doctrine of promissory estoppel comes from equity law and is an alternative to consideration as a basis for enforcing a promise.
For example, the promise to make a charitable contribution to a church is ordinarily unenforceable (promise to make a gift). However, if the promise is followed by expenditures or actions taken by the church in reliance upon the promise, it may create a binding contract.
Genuineness of Assent
As explained, the meeting of minds means a true mutual assent of the parties and is an essential element of a valid contract. A party who demonstrates that they did not genuinely assent to the terms of a contract, even if words and actions seem to prove otherwise, may rescind the contract.
There are some reasons why mutual assent may be lacking:
• Unilateral: only one party is mistaken about material fact regarding subject matter of the contract. Generally, the mistaken party will not be permitted to rescind the contract. Courts are unlikely to grant relief unless the mistake is known or should have known by the other party.
• Misrepresentation of material fact: as a rule, contracts can only be rescinded for fraud when the alleged misrepresentation is to a material fact, than to an opinion (“mere puffing” – it is customary for the seller to “huff and puff” and to exaggerate the value of his/her goods).
• Knowledge of falsity and intention to deceive (called scienter*): the party misrepresenting the material fact must do so knowingly with the intent to defraud the other party.
• Justifiable reliance of the defrauded party: a defrauded party is reasonably influenced by the misrepresentation. If the seller lies, knowingly and intentionally, and the buyer recognizes the lie, but buys anyway, there is no fraud.
• Causing injury to the other party: the defrauded party must have suffered injury as a result.
Also know as innocent misrepresentation, it is a false statement innocently made by one party to a contract with no intent to deceive. Unlike fraud, it is not a tort and the only available remedy is the rescission of the contract (no damages).
When one party coerces the other (either physically or mentally) to enter into a contract. Although the contract is valid in form, due to lack of voluntary assent, it is voidable by the innocent party.
When one party takes advantage of another by reason of a superior position in a close or confidential relationship – e.g. parent/child, doctor/patient, religious advisor/member.
The concern here is about the use of excessive pressure by the dominant person and, on the other hand, the susceptibility of the subservient person. Although the contract is valid in form, it is voidable by the innocent party.
A contract of adhesion is a standardized agreement drafted exclusively by one party (usually a business with stronger bargaining power) and signed by the weaker party (usually a consumer in need of goods or services), who must adhere to the contract and therefore has little or no ability to negotiate the terms of the contract. Thus it is placed on a “take it or leave it” basis.
While these types of contracts are not illegal per se, courts carefully scrutinize adhesion contracts and sometimes void certain provisions because of the possibility of unequal bargaining power, unfairness, and unconscionability*.
· the parties had substantially unequal bargaining positions; and
· enforcement against the adhering party would be manifestly unfair or oppressive.
Example of Offer Revocation before its Acceptance
Dickenson v. Dodds
In the Court of Appeal
Citation: 2 Ch. D. 463 (1876)
Issue: Can an offer be revoked (even though he promised not to do so) without explicit notification?
Rule of Law: This case deals with the difference between “agreements to sell” and “offers to sell”. When an agreement to sell is made and intended to be left open until a certain time, it is generally irrevocable until that time lapses. An offer to sell, on the other hand, is merely that and is revocable at the offeror’s acceptance.