Forming A Legally Binding – Contract Law

Legal Terms You Need To Know

  • Offeror – The person or ‘party’ who makes the offer.
  • Offeree – The person or ‘party’ has the option to accept the offer.
  • Consideration – Something of value that is bargained for and passed from the ‘offeror’ to the ‘offeree’.
  • Terms and conditions – The details of the offer.

What is an offer?

An offer is defined as ‘the act of offering something for sale, or the submission of a bid to buy something’.

The Act of offering something for sale could be simply displaying an item in a shop. The offer does not have to be in writing.

Understanding and applying the Mirror Image Rule is crucial in contract formation, as it ensures that both parties are in agreement on all the essential terms and helps maintain clarity and certainty in contractual relationships.

Requirements for an Offer To Be Legally Binding

For a contract to exist, there must be an offer. For this to be legally binding, it must include a promise from the person making the offer (the offeror) and a clear demand for action or for something of value from the individual receiving the offer (the offeree).

The offer must clearly define the terms of the agreement including:

  • The price
  • The specific actions of each party
  • The method of acceptance
  • Time limits or constraints for acceptance.

The Main Elements Of A Legally Binding Offer

For an offer to be legally binding, it must meet certain requirements. These requirements ensure clarity, intention, and mutual agreement between the parties involved.

  1. Intent to create legal relations: The offeror must demonstrate a clear intention to enter into a legal contract. This means that the offer is not made casually or in jest but with the genuine purpose of establishing a legally enforceable agreement.
  2. Definite and certain terms: The offer must include specific and definite terms that clearly outline the essential elements of the contract, such as the subject matter, price, quantity, and any other important details. Vague or ambiguous offers may not be enforceable as they lack the necessary clarity for a mutual understanding.
  3. Communication of the offer: The offer must be effectively communicated to the offeree, either verbally, in writing, or through conduct. The offeree must be aware of the offer and its terms in order to consider accepting it. Generally, an offer cannot be accepted if the offeree is unaware of its existence.
  4. Serious and unequivocal intention: The offer must be made with a serious and genuine intention to be bound by the terms of the offer. It should not be a mere expression of interest or an invitation to negotiate. The offeror must convey a clear willingness to enter into a contract upon acceptance by the offeree.
  5. Revocation of the offer: Until the offer is accepted, the offeror generally has the right to revoke or withdraw the offer. However, once the offeree communicates acceptance to the offeror, the offer becomes binding, and the offeror cannot revoke it unilaterally.
  6. Legal capacity and acceptance: Both parties involved in the contract must have the legal capacity to enter into a contract. This means they must be of legal age, mentally competent, and not under duress or undue influence. Additionally, the offeree’s acceptance of the offer must be unconditional and in accordance with the terms of the offer.

The Mirror Image Rule

This requires the offer and acceptance to contain the same terms. If the offer is changed in any way, this is a counter-offer that ends the original offer. The original offer cannot be accepted at a future time unless the terms are changed and the offer is made again.

See: Separate Clever article Mirror Image Rule

No further negotiations

After the offer and acceptance are made there should be no intention for further negotiations to take place. Neither party can change the terms of the agreement unless both parties agree to the changes and a new offer and acceptance process takes place.

The offer must be complete

This means that the offer must be known by the offeree (the person the offer is made to). The offeree does not act in ignorance. There can be no acceptance if there was no knowledge of the offer being made.

For example:

A person loses an expensive ring and offers a $1000 dollar reward to anyone who finds, it and returns it to them.

Peter is out walking and finds a ring. He takes it to a local jewelry shop which tells him they will return it to the owner. Peter is not unaware of the offer of a reward for finding the ring until later that evening. When he sees the offer of a reward Peter contacts the owner of the ring and asks them for the reward money.  The owner refuses to pay him.

In this case, Peter returned the ring out of his own good nature. He was not aware of the offer at the time of his actions and therefore could not have accepted the terms of the offer. Therefore, there was no contractual agreement between Peter and the owner of the ring and Peter was not entitled to the reward money.

Firm Offers

An offeror can normally cancel (revoke/terminate) an offer at any time before it has been accepted – unless it is a firm offer’.

A firm offer is made by a merchant or trader. It must be in writing and state a specific time limit for the offer. It is a promise to keep a sale offer open for a certain amount of time. This may give the offeree (purchaser) time to make arrangements for funds etc.

“I will offer this car to you for $2000 but you must get the money to me before 11 am tomorrow or I will offer it to someone else.”

The Statute Of Frauds (Offers in writing)

The ‘Statute of Frauds’ requires a written offer and acceptance in certain situations including:

  • Agreements regarding real estate
  • Answering for another person’s debts
  • Marriage prenuptial agreements
  • Contracts that the parties cannot perform within a year.

Note: If an offer is made orally it is always best to make the acceptance in writing, clearly stating the points in the offer you are accepting. This will help to make sure that there are no misunderstandings later.

What is not an offer to contract?

  • An invitation to offer. E.g “Who would like to buy my fish?” This is not a legally binding offer because I am ‘inviting people to make an offer to buy my fish which I can accept or refuse.
  • An offer where the terms are vague or unclear – The terms must be clear enough to expect a ‘reasonable’ person to understand them.
  • An offer without an exchange of something of value between the contracting parties (consideration). E.g “I’ll cut your grass later” is not a contractually binding offer as there is no exchange of something of value between the two parties.

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Posted in Business Law, Contract Law.