This article will focus on the elements which form a valid contract. The aim of this article is to give readers a deeper understanding of what constitutes a contract by exploring case law and its application.
What Constitutes a Contract?
A contract is an agreement with specific terms between parties, creating mutual obligations that are enforceable by law.
In order for a contract to be enforceable by law, it must be mutually agreed upon, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.
The agreement can be either oral or written between two or more parties which creates a legal obligation.
It is well established in English Law that a basic contract must comprise four key components:
- Offer
-Acceptance
-Consideration
-Intention to create legal relations
To further explain -
- An Offer is a promise to do something or refrain from doing something in exchange for something else. An offer must contain some essential terms; including the price and subject matter of the contract. The party who proposes the offer must also communicate it to the other person. -An Acceptance is one party's compliance with the terms of an offer that was proposed by the other party.
-Consideration is a promise, performance, or forbearance bargained by a promisor in exchange for their promise. Consideration includes items of value offered by each party of a contract to the other. The absence of consideration makes the contract unenforceable.
-Intention to Create Legal Relations, indicates the intention of the parties to enter into a legally binding agreement.
Case Law [on Formation of a Contract / Intention to Create Legal Relations]
Blue v Ashley [2017] EWHC 1928
Facts
Blue was an Investment Banker. Ashley was the founder and majority shareholder of Sports Direct. They both had prior business relationships but did not know each other well.
The men met at a pub for drinks. The pair consumed a considerable amount of alcohol and were having discussions about Sports Direct's share prices. During the conversation, the topic of incentivizing Blue on the company's share price came up. The talks led to Ashley allegedly saying that if they split the difference and call it £15 million if the stock gets to £8 per share.
Blue responded that that sounded fair. When Sport Direct share price began to rise, Blue asked Ashley if the agreement was still on. Ashley responded 'I've got it, I've got it. We're still cool, we're cool."
Subsequently, Sports Direct's share price later exceeded £8. Blue attempted to enforce the incentive agreement. He argued that the conversation was general banter.
Issues
i. Was Ashley's statement an offer?
ii. Did Ashley intend to be legally bound by the statement?
Decision
The court held in favour of Ashley. The factors surrounding the Judges' decision:
- The informality of the setting;
-The 'jocular' and mischievous tone of the conversation;
-Ashley being drunk;
-The 'incentive' made no commercial sense for Ashley. He did not know Blue well, and the number chosen was random;
- The meeting was not arranged to discuss Blue's work or his role at the company.
It was held that there was no intention to create a legal relationship, therefore Ashley was not bound to pay Blue £15 million or any monies as there was no contract formed.
Essentially, the basic principles of the Laws of Contract require the presence of an offer, acceptance, intention to create legal relations, consideration, and certainty of terms.
The Next Article will feature the remedies available in English Courts where there is a breach of a valid contract.
Comments
Post a Comment