A contract is an agreement between two or more parties, whether it be between two business entities, between two individuals or even both, that outlines and defines the terms of the said exchange.
Having a legally binding contract is essential for clarity and assurance so that all parties involved know their responsibilities and what is expected of them. Essentially, a well written valid contract will help avoid any disagreements and confusion, especially if the contract is a long-term agreement between the parties. Thus, if “things go wrong” along the way, a valid contract will provide protection to the parties especially for the innocent and/or aggrieved party.
Contract law and business entities
Businesses enter into various agreements on a daily basis, either with other businesses and/or individuals and as such, it is fundamental for each business entity to understand and be aware of some of the key elements of a valid contract.
What are the elements of a valid contract
For a contract to be recognised and valid, the common law and the Cyprus Contracts Law (Cap 149) require that the following elements be present:
1. Offer
2. Acceptance
3. Consideration
4. An intention to create legal relations between the parties
5. Capacity of all parties involved
6. Legality (the Contract cannot be illegal)
Without all of the above elements, a contract is not legally binding and may not be enforced by the courts. This article will analyse the first and second elements.
Does an agreement need to be in writing?
The answer is no! Agreements between people occur on a daily basis and can be made either in writing, orally, a combination of the two or even by the conduct of the parties. As the renowned judge Lord Denning said in Gibson v Manchester City Council “… you should look at the correspondence as a whole and at the conduct of the parties and see therefrom whether the parties have come to an agreement on everything that was material. If by their correspondence and their conduct you can see an agreement on all material terms – which intended thenceforth to be binding – then there is a binding contract in law even though all the formalities have not been gone through…”
Are there any exceptions to the above rule?
Yes! All agreements to sell property, rent property for periods exceeding one year or for transfer of shares within a company, must be in writing and in some cases with witnesses. So, if you are looking to sell your house, sell shares in your company or rent your apartment for a period over one year, you must do so in writing! All other agreements don’t necessarily need to be in writing although it is always advisable to do so.
What is an offer?
It is a statement by one person to another person with the intention to be bound by the acceptance of the stated terms and/or an expression of willingness by the statement- maker to be bound on certain terms. Such an example would be, George tells Jack that he will pay him €1000 if Jack paints George’s house (Example 1). This example shows how George has made a verbal offer to Jack and acceptance of the offer will take place when Jack consents to the terms of the offer and proceeds to paint George’s house.
What about advertisements? Are they offers?
Interestingly no! They are referred to as “invitations to treat” (Patridge v Crittenden) as opposed to offers for sale. The reason? Think about it… if an advertisement is an offer, then traders/shops/businesses would have to supply all the quantities ordered (“accepted”) by every person reading the advertisement, thus most probably finding themselves involved in a number of unwanted contractual obligations!
So, what does an “invitation to treat” (Πρόσκληση για διαπραγμάτευση/υποβολή πρότασης) actually mean?
An “invitation to treat” is part of a negotiating process. In other words, one party is willing to invite an offer but is not legally bound yet. Thus, if you see an advertisement about a sofa on sale in a specific shop and you visit the said shop the next day to purchase the sofa and it is out of stock or the price has changed, then you cannot hold the shop keeper liable for breach of contract because the advertisement was only an invitation to treat … pending negotiations.
What about display of goods in a shop? Are they offers or invitations to treat?
They are invitations to treat! In Pharmaceutical Society of GB v Boots Chemists, the court argued that the display of goods on a supermarket’s shelves was merely an invitation to customers to make offers to buy. Thus, when you pick up the goods from the shelf at a supermarket and you proceed to the cashier to pay, you have merely made an offer to purchase and the cashier and/or owner of the said shop can refuse to accept your offer to purchase the said goods!
What about tenders? I’m a construction company and I have submitted a tender to build a house for someone. Have I made an offer?
A request for tenders from construction companies, for the construction of a building, is an invitation to treat and each tender by the various construction companies are considered offers! So, the person requesting the tenders is free to accept or reject any tender and the construction company making the tender is bound by its offer to tender! (Spencer v Harding). So, make sure you are willing and ready to take on the project before submitting your tender!
What if the invitation to tender stipulates an undertaking to accept the highest or lowest tender?
Then the person whom requested the tenders is bound to accept, as per the terms stipulated in the invitation to tender – and if he does not comply with the stipulated terms (and proceeds to select another company and not the highest / lowest tender) then he would be in breach and could be held liable in damages.
What type of damages could be recoverable in this instance?
They could be limited to the recovery of wasted expenses in preparation of the tender or perhaps even loss of chance could be appropriate. The question of breach of contract and what type of damages should be awarded is a vast topic, based heavily on case law and precedent, that is an article on its own!
What about auctions? Are they invitations to treat or offers by the auctioneer?
Interestingly, an auctioneer’s request for bids is an ‘invitation to treat’ and the bid is the participant’s offer so the auctioneer is free to accept or reject the said bid/offer. Thus, acceptance by the auctioneer occurs on the ‘fall of the hammer’ which means that the bidder’s offer can be withdrawn at any time before that (Harris v Nickerson). Therefore, make sure before you make an offer to buy that painting or car at Christie’s Auction House in London because you might be in trouble if you change your mind after the fall of the hammer!
What is acceptance of an offer?
It is an unconditional and absolute acceptance of the original offer with all the terms and conditions attached to it. As a general rule, acceptance must be expressed or communicated to the offeror by the offeree in order for it to manifest mutual assent.
Does acceptance need to be in writing?
Strictly speaking no! Acceptance can be inferred by conduct! (in some cases). In Brogden v Metropolitan Railway, Lord Blackburn said that “…when an offer is made to another party, and in that offer, there is a request that he must signify his acceptance by doing some particular thing, then as soon as he does that thing, he is bound”. Thus, in Example 1, Jack doesn’t need to expressly tell George that he accepts his offer – he can just show up the next day and start painting George’s house! This will be considered acceptance by conduct!
What is a counter offer and why is it important?
A counter offer destroys the initial offer by the offeror, effectively reversing the original roles, with the offeree now becoming the offeror and the initial offeror being in the position to accept or reject the counter-offer.
What if I send an email saying that I am extremely interested in the offer but need additional information on the offer before making up my mind. Have I accepted the offer or made a counter offer without realising?
No, you haven’t. According to case law, you have not made an acceptance nor a counter-offer. You have just merely requested for additional information (Stevenson, Jacques v McLean).
Can I rescind an offer that I made to someone? I changed my mind!
Yes, you can. An offer can be revoked at any time before it is accepted – as long as this is clearly communicated to the offeree (“I think that a person who has made an offer must be considered as continuously making it until he has brought to the knowledge of the person to whom it was made that it is withdrawn” – Henthorn v Fraser).
What if the offeror prescribes the method of Acceptance?
If the offeror insists on acceptance in a particular manner, then he is entitled to insist that the said acceptance is effected or communicated to him in that specific way. Thus, if the offer stipulates that you need to accept via letter by registered post and you send your acceptance via email, then… you have not adhered to the terms of the offer and your acceptance can be rejected!
What if we signed a Preliminary/Provisional Agreement with a “subject to contract” clause? Is there a binding contract between the parties?
Strictly speaking, “subject to contract” means that the parties are not bound until the final Agreement is drawn up and agreed upon between the parties. However, in (Branca v Cobarro) the courts explained that one has to see what the Parties intentions in the Preliminary/Provisional Agreement were and what they sought to achieve.
Were the parties intending to be bound? Did they intend for their Preliminary/Provisional Agreement to be binding until it is formally replaced by a formal contract? If yes, then it will be hard to argue that the Preliminary/Provisional Agreement was not binding for both parties … unless this was clearly stipulated in the Preliminary/Provisional Agreement. In the Branca case for example, the court ruled that it does not matter what the Agreement heading says but what the words in the document say. Therefore, the courts must see whether the words in the Preliminary/Provisional Agreement reflect that ‘there should be no escape for either of them [the Parties] in that interim period between the signing’ of the Preliminary/Provisional Agreement and the formal Agreement.
So, if you are signing a Preliminary/Provisional Agreement and you wish for it not to be binding (until the final terms of the said Agreement are confirmed in a more formal and detailed Agreement), it is important that this be clearly stated in the said Preliminary/Provisional Agreement.
Author: Christiana Askanis
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