52 3: Formation of contract I Part B The law of obligations
Chapter Roundup
A valid contract is a legally binding agreement, formed by the mutual consent of two parties.
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.
The three essential elements of a contract are offer and acceptance, consideration and intention to
enter into legal relations.
As a general rule, a contract may be made in any form.
The first essential element in the formation of a binding contract is agreement. This is usually evidenced
by offer and acceptance. An offer is a definite promise to be bound on specific terms, and must be
distinguished from the mere supply of information and from an invitation to treat.
An offer may only be accepted while it is still open. In the absence of an acceptance, an offer may be
terminated in any of the following ways.- Rejection
- Counter-offer
- Lapse of time
- Revocation by the offeror
- Failure of a condition to which the offer was subject
- Death of one of the parties
Acceptance must be an unqualified agreement to all the terms of the offer. Acceptance is generally not
effective until communicated to the offeror, except where the 'postal rule' applies. In which case
acceptance is complete and effective as soon as it is posted.
The general rule is that acceptance must be communicated to the offeror and that it is not effective (and
hence there is no contract) until this has been done. However this rule does not apply in all cases.
In certain circumstances, the courts may infer the existence of a contract without the formalities of offer
and acceptance. This type of contract is a collateral contract.