1. What are the basic requirements for making a valid contract?
A valid contract normally contains the following six basic elements.
(i) Intention to create legal relations
It is generally presumed that in a commercial transaction, the contracting parties must have the intention to create a legally binding contract. In other words, if you have signed a contract for business-related activities, then you will be able to sue the other party if that party does not fulfil the contractual provisions, and vice versa.
This presumption can only be rejected if the parties expressly state that they do not intend to make a legally binding contract. Sometimes you may see the words "subject to contract" printed on a document. These words have the legal meaning that the document is not a contract, and that all of the contents will be bound by a subsequent contract (if the parties sign that contract). A party that is acting “subject to contract” can withdraw from the negotiation at any time before the contract is concluded. In case of dispute, the burden of proof that the intention was to create a binding contract rests on the person who wishes to rely on the contract.
An offer is an expression of readiness to do something which, if followed by the unconditional acceptance of another person (see item (iii)), results in a contract. For example, if a company tells you that it will sell you 100 boxes of red wine at the price of $100,000, that company is making you an offer.
If no time limit is specified, an offer is valid for a reasonable length of time before the offeror (the person who makes the offer) can revoke or cancel it. To avoid potential disputes, however, the offeror should specify the deadline for the acceptance of an offer.
It is also important to note that the offeror cannot take silence as a form of acceptance. This means the offeror cannot say "If I do not hear from you within 10 days, then I will assume that you have accepted my offer and will pay for the product".
An offer must be distinguished from an "invitation to treat", which merely invites other people to make offers but is not in itself an offer. Examples of invitations to treat include: invitations to tender, displaying goods on the shelves of a shop, and the advertisement of goods or services in newspapers or on television (unless it is expressly stated that the advertisement is an offer).
There is no contract unless and until the offer is accepted by the person to whom the offer is addressed (sometimes called "the offeree"). Acceptance is normally made orally or in writing, but if the contract allows that the acceptance and performance of contractual duties are to be carried out simultaneously, then acceptance can also be made by conduct. For example, when a supplier receives your cheque, that supplier may immediately deliver the goods to you without saying or writing anything.
It is recommended that both of the contracting parties clearly specify and agree to the method of acceptance.
If the method of acceptance is not specified by the offeror, then the following rules may apply.
- Postal Rule – If it is reasonable to use the post for the offer and acceptance process, then the contract is formed at the time of posting the letter of acceptance, even if the letter is lost in the post.
- Receipt Rule – If the acceptance is made orally, then the contract is formed once the offeror received the acceptance. When an acceptance is sent by fax, it is deemed to be valid when the message is received, even if the offeror does not in fact read the fax immediately. This rule also applies to e-mail messages (see section 17 and section 19 of the Electronic Transactions Ordinance).
Another important point to note is that a conditional (or partial) acceptance is only a "counter-offer" and does not constitute a valid contract. In other words, if the person to whom the offer is addressed only accepts some of the terms or proposes some new terms, then that person is not accepting the offer but is making a new offer to the other party. In the business world, there may be a series of counter-offers before a final acceptance comes out.
(iv) Consideration (benefit given to the other party)
In contract law, consideration means a detriment to the person who made the promise or a benefit conferred on the other party, both of which are measurable in economic terms. Money, goods and services are the most common examples of consideration. You should note that consideration need not be adequate, which means that if the seller or service provider is contracted to sell a product or service at a price that is below the market price, then that seller or provider cannot subsequently go to court to claim the shortfall.
A promise of a gift is not enforceable in law because of the lack of mutual exchange of consideration (the recipient does not have to pay anything in return). An exception to this rule is when a contract is executed in a specific form called a "deed", in which case the recipient may not be required to give consideration to the other party.
(v) Capacity (the authority or ability to make contracts)
Persons under the age of 18 (called "minors") and lunatics (mentally disordered or intoxicated persons) do not have the capacity to enter into contracts. Any contracts that are made by persons who are lacking in legal capacity are voidable: that is, the party who needs the protection can seek to avoid the contractual liability.
An exception to this rule arises when the parties enter into a contract for "necessaries" (a legal term for "necessities", which means the goods or services that are suitable to the condition of life of a minor and to that minor’s actual requirements at the time of the sale and delivery, such as clothes or food). A minor who fails to pay for "necessaries" can be sued by the seller.
Contracting parties must ensure that their agreement is complete, i.e. not lacking in some essential terms and it is not uncertain, for example, vague or ambiguous. An agreement may be unenforceable if it is incomplete or uncertain.