ACCA F4 - Corp and Business Law (ENG)

38 3: Formation of contract I  Part B The law of obligations

Study guide

Intellectual level

B The law of obligations^

1 Formation of contract

(a) Analyse the nature of a simple contract 2

(b) Explain the meaning of an offer and distinguish it from an invitation to treat 2

(c) Explain the termination of an offer 2

(d) Explain the meaning and consequence of acceptance 2

Exam guide

Questions may require you to identify whether a valid contract exists, so it is important to understand the

circumstances where valid offers are made and where acceptance is communicated acceptably.

1 Definition of contract

A valid contract is a legally binding agreement, formed by the mutual consent of two parties.

A contract may be defined as an agreement which legally binds the parties. The underlying theory is that

a contract is the outcome of 'consenting minds'. However, parties are judged by what they have said,

written or done, rather then by what they were actually thinking.

Almost every sitting will have a scenario-based contract law question requiring you to analyse the situation

and provide simple advice.

2 Factors affecting the modern contract

The law seeks to protect the idea of 'freedom of contract', although contractual terms may be regulated

by statute, particularly where the parties are of unequal bargaining strength.

2.1 Inequality of bargaining power

Where two parties make an agreement, they invariably have differing levels of bargaining power. Many

contracts are made between experts and ordinary consumers. The law will intervene only where the

former takes unfair advantage of their position and not simply because one party was in an inferior

bargaining position. Freedom of contract is a term sometimes used and can be defined as follows.

'The principle that parties are completely unrestricted in deciding whether or not to enter into an

agreement and, if they do so, upon the terms governing that relationship. In practice, this is not

always the case because one may be in a much stronger economic position, and legislation has

been introduced in order to redress the balance.'

2.2 The standard form contract

Mass production and consumerism have led to the standard form contract.

Key term

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Exam focus

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