1、IAS-International Accounting School www.IASHiLearning objectives Define a contract Identify the essential elements of a contract Be aware of factors which might affect the validity of a contract and their consequences Understand and apply the rules relating to offer, acceptance and the intention to
2、create legal relations Understand and apply the rules relating to consideration Understand that contract terms may be express or implied into the contract.The specific syllabus reference for this chapter is 1 a.Syllabus linksAs seen above, the issue of contract formation could be relevant in many di
3、fferent areas of the syllabus, for example accounting and auditing, employment, business and financial management.Contracts are also important in assurance; for instance, a key contract is the engagement letter between the client and the assurance provider.Examination contextContract is an important
4、 part of the syllabus. Typically seven out of fifty questions relate to contract law. Understanding the basic precepts relating to contract is vital.You are likely to be presented with scenarios and may have to conclude whether a valid contract has been formed. Many cases are referred to in this and
5、 later chapters. They will not be examined directly, but illustrate points of law that could be.In the assessment, candidates may be required to: Recognise when a legally binding contract exists between two parties Understand how a contract may be enforcedLawIAS-International Accounting School 1 The
6、 validity of a contractSection overview A valid contract is a legally binding agreement, between two parties, which agreement may be evidenced by writing, words or action. Three essential elements must be present, namely- Agreement- An intention to create legal relations- Consideration.It is almost
7、invariably the case that the two parties to a contract bring with them differing levels of bargaining power. A contract may be made between a large retail company and an individual for example. In such cases, the agreement is likely to be in the form of a standard form contract, prepared by the domi
8、nant party and which the other party has no choice but to take or leave.Generally speaking the law will not wish to restrict or interfere with the ability of contractual parties to decide whether or not to enter into a contract and, if so, upon what terms (freedom of contract). However, it will ofte
9、n intervene where one party seeks an unfair advantage as a result of his superior bargaining position.Such intervention will be made by the courts or by legislation. Thus, for example, the Sale of Goods Act implies terms into a contract which impose obligations on the business seller as to the quali
10、ty and fitness for purpose of the goods he sells. Likewise the Consumer Credit Act affords the consumer protection where he enters into credit agreements. In respect of exclusion clauses, in which typically the stronger party seeks to avoid liability, the Unfair Contract Terms Act (discussed in Chap
11、ter 2) may result in such a clause being void outright or void if the court considers it to be unreasonable.You should be aware that the European Commission put forward a draft regulation for a new Common European Sales Law (CESL) in 2011. This was intended to be implemented at the end of 2012, but
12、continuing opposition from the UK government and others means that it now seems unlikely to become law in the near future. The CESL aims to promote trade between member states, by creating a harmonised contract law which is designed to apply to cross-border contracts for the sale of goods, digital c
13、ontent and related services. It will apply only where the parties choose to adopt it.In order to be valid, three essential elements of a contract must be shown to be present. These are dealt with in detail in sections 2-4 below. Suffice it to say here that those elements are Agreement between the pa
14、rties An intention to create legal relations Consideration1.1 Void and voidable contractsEven if these essential elements can be shown, a contract may nonetheless be rendered void or voidable by one or more of the following vitiating factors:Lack of capacity An individual must be of sound mind and V
15、oidable at the option of the aged eighteen or over person without capacityAbsence of free will A party should not be made to enter into a Voidable contract other than by his own free will, ie not by duress or undue influenceIllegality A contract should not be illegal or offend Void public policyMist
16、ake You should be aware that if one or bothparties alleges that they were mistaken in some way, this may affect the validity of the contract. However, the law is as complex as the facts of each case are varied and you do not need to know the law for the purposes of your studies.Misrepresentation If
17、A makes a pre-contractual statement of Voidable fact that is intended to and does cause B to enter into the contract but turns out to beuntrue (misrepresentation) the other party may choose to avoid the contractThe consequences of a contract being rendered void or voidable are as follows:VoidA void
18、contract is not a contract at all. The parties are not bound by it and if they transfer property under it they can generally recover their goods even from a third party.VoidableA voidable contract is a contract which one party may set aside. Property transferred before avoidance is usually irrecover
19、able from a third party.1.2 Unenforceable contractsEven if a contract satisfies the above requirements and is valid, it may still be unenforceable. This means that if either party fails to perform his part of the contract, the other party cannot compel him to do so.A contract will be unenforceable w
20、here it is not in the correct form. Generally speaking a contract may be made orally or in writing and an oral agreement will be just as binding as a written contract.However in certain cases the law provides that an oral contract will not be sufficient, for example agreements for the transfer of la
21、nd and consumer credit agreements (that are regulated by the Consumer Credit Act 1974 (as amended by the Consumer Credit Act 2006) must be in writing. Note that, increasingly, contracts are made electronically and an electronic signature can be used as evidence of the validity of a contract in the s
22、ame way as a written signature (s. 7 Electronic Communications Act 2000).Another example with which you should be familiar is a guarantee. This is where a guarantor promises to pay a creditor the sum of the debtors debts, in the event that the debtor fails to pay them himself. The agreement itself n
23、eed not be in writing but the terms must be evidenced in writing before any action is brought. The written evidence should be signed (or acknowledged in some way) by the guarantor.Golden Ocean Group Ltd v Salgaocar Mining Industries PVT 2011The facts: Brokers for Golden Ocean and SMI exchanged a num
24、ber of emails in which the terms of a charterparty by SMIs Singaporean chartering arm, Trustworth, were negotiated, but they were never formalised into a written agreement. Emails early in the exchange had stated that the charter would be fully guaranteed by SMI. When Trustworth refused to take deli
25、very, Golden Ocean sued SMI on the guarantee.The decision: The Court of Appeal recognised that contracts are often negotiated informally by email (particularly in the shipping industry) and held that a single document was not necessary. Nor was it material that no documents had been signed in the tr
26、aditional way. The typed name of the broker for SMI in the final email had clearly signified his agreement to all negotiated terms and constituted a valid signature. Interactive question 1: Essentials of a valid contract Difficulty level: EasyWhat will be the consequences of the following in relatio
27、n to a purported contract between two parlies?AThere is clear agreement between the parties on all terms and they intend to create a legally binding agreement but there is no consideration.BOne of the parties is aged 17CThe contract is an agreement to defraud HM Revenue & Customs.DThe contract is ma
28、de orally and provides for Graham to pay Harry the debt owed to Harry by Imran.See Answer at the end of this chapter. As noted above, the first essential element in the formation of a valid and binding contract is agreement. This is usually analysed and understood in terms of offer and acceptance. I
29、t is a matter of interpretation whether something amounts to an offer. There are a number of rules which determine whether an offer has been validly accepted.2.1 What constitutes an offer?An offer is a definite promise to be bound on specific terms. It is made by an offeror.It is a matter of interpr
30、etation as to whether something is sufficiently definite to comprise an offer capable of acceptance. A statement that is vague and that cannot be rendered certain by reference to previous dealings or custom cannot be an offer. Only an offer in the proper sense may be accepted so as to form a binding
31、 contract. A statement which sets out possible terms of a contract is not an offer unless this is clearly indicated, although if, in the course of negotiations for a sale, the vendor states the price at which he will sell, that statement may be an offer which can be accepted.An offer must be something more than a supply of information or a statement o
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