A contract is an agreement between two parties and intended to be legally binding. The law of contract sets out the rules that are needed to form of a valid contract. In order to form a contract we need to consider the following; offer, acceptance, consideration and an intention to create a legal relationship.
Offer
However simple it may seem, various steps need to be taken in order to form a contract. We look at what amounts to a valid offer. An offer can be made orally, in writing or by way of performance. This is different from an 'invitation to treat' where parties are merely inviting offers that can then be accepted or rejected by him - i.e. at an auction or an advertisement.
Acceptance
Offer and acceptance go hand in hand. Without an offer there cannot be acceptance. An acceptance is a final and unqualified acceptance of the terms of an offer. It is very important that the acceptance is communicated. The offer can be terminated by rejection, counter-offer, lapse of time, death of the other party, or by revocation before it has been accepted.
Intention to create a legal relationship
We then consider what is meant by intention to create a legal relationship. The general rule is that a social agreement is not usually binding, whereas a business agreement is.
Consideration
The mutual exchange of something of value. Consideration is a promise to perform in return for something, like a payment, and this has to hold some kind of value. Past consideration is not enforceable.
Once the elements above have been satisfied a contract is formed. However, a contract can be breached.
Breach of contract
A breach of contract occurs when one party of the contract does not honour the terms of the contract. This happens when either party breaks a term of the contract. A breach may be of a verbal, written or implied nature. If it is evident that one party has breached the contract then they can claim damages and other remedies.
Damages
Damages for breach of contract by one party consist of a sum equal to that of the loss incurred from the breach of contract. The courts will enforce damages in order to put the other party back into the position it would have been in if the contract had not been breached.
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