Contract Law: Formation

Question 1

Who has the power to bind themselves by contract?

Answer 1

• persons who have the capacity to acquire legal rights and obligations
• natural and artificial persons
  • Adult persons of sound mind have full contractual capacity.
  • Corporations have the same legal capacity and powers as a natural adult person
  • Government bodies may also have the capacity to enter into contracts.

Question 2

Who does not have the capacity to bind themselves by contract?

Answer 2

• persons who are not yet adults have only a limited capacity to contract
• some adults may have their legal capacity restricted by a mental disability, by the effect of intoxicating drugs or by insolvency
  • A person who is insolvent (bankrupt) has a restricted capacity to enter into contracts
  • A person under the influence of intoxicating drugs may also be so unaware of what they are doing that they cannot bind themselves contractually

Question 3

What makes a contract legally enforceable?

Answer 3

A contract is said to be enforceable at law because, when a contract is made, the parties become subject to legal ‘obligations’. An obligation is a legally binding duty to give or do something.

When a contract is made, it creates legally enforceable rights and duties, which we refer to as ‘obligations’.

Question 4

What is the pre-contractual phase?

Answer 4

• In many cases, a pre-contractual phase or process takes place before a contract is made. We can call this the ‘negotiation’ phase, during which the parties exchange information and explore the possibilities to see if they can reach an agreement to which they are prepared to bind themselves.
  
  • The fundamental question to be decided is: Was a contract made and, if so, what promises does it contain? Only at that point do the parties become bound by the obligations to carry out their promises

Question 5

Describe the contractual capacity of minors

Answer 5

• Minors (persons under the age of 18 years) have only a limited capacity to bind themselves by contract, either to
  - acquire ‘necessities’ or
  - in agreements that are for their benefit
  
  • This protects young persons from the dangers of entering into contracts that may disadvantage them.

Necessities may comprise things such as: food, clothes, equipment, accommodation, medical services and even transport.

A minor also has the capacity to be bound by a contract for employment, an apprenticeship, training or education, as long as the agreement is, on balance, for the minor’s benefit. If not, the agreement will not be enforceable against the minor.

Question 6

Avoidance of certain contracts by minors

Answer 6

When a minor enters into a contract that gives them an interest in property of a permanent nature or which involves a continuing obligation, the contract can be avoided if the minor so chooses, at any time before reaching the age of 18 or within a reasonable time after turning 18 years of age.

Question 7

Describe the contract capacity of mentally disabled persons

Answer 7

• In some cases, individuals are declared by a court to be permanently unable to manage their own affairs. Such persons cannot validly enter into a binding contract.
  
  • HOWEVER, if a mental disability does not permanently impair the individual’s understanding and awareness, they will be bound by a contract unless, at the time they entered into it, their disability prevented them from understanding what they were doing and the other person was aware (or should have been aware) of their impaired mental condition

Question 8

What are the 4 essential requirements of contract formation?

Answer 8

1. It can be inferred that the parties intend to be legally bound
2. There is either formal execution of the agreement in a deed, or, as an alternative, the exchange of ‘something of value’ when the contract is made, generally called ‘consideration’.
3. There is a sufficient degree of agreement on the terms of the contract.
4. Certainty

Question 9

Agreements typically not intended to be legally binding.

Answer 9

• When close family members reach domestic agreements, it is normally inferred from the facts that these agreements are not intended to be legally binding
  • A person who wants to treat an agreement with a close family relation as legally binding will need to prove additional circumstances which indicate an intention to be legally bound

Agreements made between friends, and agreements to provide volunteer or charitable services, are not intended to be legally binding.
The person wishing to treat the agreement as legally binding bears the onus of proving any additional circumstances from which an intention to be legally bound can be inferred.

Question 10

Agreements typically intended to be legally binding

Answer 10

Agreements reached in a commercial context

• When agreements are reached in a commercial context, it will usually be inferred that the parties intend to be legally bound.
  • If a party to an agreement reached in a commercial context wishes to argue that it was not intended to be legally binding, they bear the onus of proving facts to establish this

Question 11

What is a conditional agreement?

Answer 11

• If the parties want to, they can delay the final creation of a contract, for example, until some event has taken place such as the signing of a formal written agreement.
• HOWEVER, care must be taken to ascertain exactly what the parties intended:
  • The surrounding facts may indicate an intention to avoid being legally bound at all until formalities are completed.
  • In other circumstances, the facts may show that only performance of their agreement is intended to be delayed, in which case the agreement becomes legally binding even before it is formalised.