Formation of a legally binding contract and enforceable contract

A contract is a legally binding contract created by an offer and an acceptance between two or more parties who exchange consideration to create a legal obligation between them. It sets out the rights and obligations of the contracting parties.

We are legally bound by the binding contract we entered into. In the event of breach, the aggrieved party will be seeking for the appropriate remedy. However, at the initial stage, the Court will have to first determine whether the contract between the parties is a valid, legally binding contract and an enforceable contract before even moving on to any finding of breach of that contract.

The party who makes an offer is called the offeror and the party who accepted the offeror’s offer is called the offeree. There are four elements of a contract, namely, an offer made by the offeror, an acceptance of that offer by the offeree, the intention of the parties to create legal relations and consideration passes between the parties. This begs the question: what makes a contract legally binding?

Offer

An offer is an undertaking which is made by the offeror with the intention to be legally bound by the terms of the binding contract upon the acceptance of the offer by the offeree. The offer must express or imply a promise to be legally bound by the offer, and not simply an invitation to treat.

A key concept on the element of offer is to ascertain the distinction between an offer and an invitation to treat. An offer can give rise to a binding contract whereas an invitation to treat does not as it is merely an invitation for offers.

As a customer walks in a shop with goods being displayed on the shelves, the goods do not constitute as offers but mere invitation to treat. It is the customer who makes the offer to purchase the goods when he takes the goods off the shelves and proceeds to the cashier for payment. It is the cashier, on behalf of the entity he or she is working for, who will therefore decide whether to accept the customer’s offer or not. An agreement would be formed if the cashier were to accept the customer’s offer to purchase the goods.

Advertisements are generally invitation to treat and do not constitute an offer. However, in exceptional cases based on their factual circumstances, advertisements may constitute an offer. In this latter situation, there are several factors to be weighed and considered in determining whether such an advertisement is specifically intended to be an offer.

An offer can be revoked or withdrawn at any time prior to it being accepted. However, such revocation or withdrawal of the offer must be communicated to the targeted offeree, be it through the offeror or some other reliable source.

Acceptance

A binding contract is created when an offer is accepted by the offeree. An acceptance must mirror the offer. It means that the acceptance must be unqualified and unconditional of all the terms stated in the offer. As such, there must be a matching offer and acceptance. Rejection of an offer, a qualified acceptance, or a variation of the terms of the offer, does not therefore constitute acceptance such as to give rise to a valid agreement. It will instead terminate the offer. In the event where there is a variation of the terms, it would be considered as a counter-offer, which is open for acceptance.

An acceptance must be effectively communicated from the offeree to the offeror. An acceptance can be expressed in writing or orally. However, silence does not equate to the acceptance of a legally binding contract.

Intention to create legal relations

It must be shown that objectively, the parties had the intention to be legally bound by the contractual terms, being their respective rights and obligations. To form a legally binding contract, it is essential. As such, a mere response to an inquiry or a request for information would not constitute an intention to enter into legal relations as these are usually made without any intention to be legally bound.

An illustration would be where party A requested party B for the lowest price that B is willing to sell his pen to A. B’s answer to A indicating the lowest price he is willing to sell his pen to A would not constitute an offer as B was merely responding to A’s inquiry on the lowest price of the pen.

There is a legal presumption that in business or commercial relationships, parties generally intend to form a binding contract when they enter into agreements, in the absence of an explicit statement that the parties intended otherwise. On the other hand, agreements entered into by parties in domestic or social settings are generally presumed not to be initially intended as legally binding contracts. In such a situation, the Court would require a clear statement that the parties intended to be legally bound when entering into agreements.

Consideration

The agreement must be supported by consideration given in exchange for a promise. The promisor will request for a consideration in exchange for the promise that the promisee is seeking to enforce. The consideration must be something of value. The value of the consideration here, in the legal sense, does not require it to be equal or commensurate with the value of the promise. Something of a nominal value can even constitute sufficient consideration. Essentially, the attitude of the Courts is that the Courts will not easily find that element of consideration had not been satisfied. It is almost always considered satisfactory in a legally binding contract.