Contract

Definition of a Contract

A contract is a legally binding agreement between two or more parties that is recognized and enforceable by law. Its formation follows the process of offer and acceptance. Several prerequisites must be satisfied for an agreement to qualify as a legally binding contract:

Offer and Acceptance: One party must make an offer, and the other must accept it.
Consideration: There should be something of value exchanged between the parties unless the contract is executed as a deed.
Intention to Create Legal Relations: Both parties must intend for the agreement to be legally binding.
Capacity to Contract: Parties must have the legal ability to enter into a contract, which means they are not minors, mentally incapacitated, or intoxicated.
Compliance with Legal Formalities: The contract must meet any formal legal requirements specific to its nature.
Legality: The content of the agreement must be legal.
Voidable Provisions: The contract should not be invalidated by specific common-law or statutory rules or inherent defects.

While most contracts can be oral, written, or implied through conduct, specific types require a written format or even a deed for validity. For example, contracts for the sale of land or hire-purchase agreements must be in writing.

Examples

Employment Contract: A written and signed document outlining the terms of employment, roles, responsibilities, and compensation of an employee.
Lease Agreement: A formal contract between a property owner and tenant specifying the rental terms and conditions.
Sales Contract: An agreement where a seller agrees to deliver goods or services to a buyer in exchange for compensation, often formalized in writing.

Frequently Asked Questions (FAQs)

Q1: What constitutes an offer in a contract? A1: An offer is a clear and definite promise to be bound by specific terms, made by the offeror to the offeree, intended to be binding upon acceptance.

Q2: Can a contract be valid without consideration? A2: Generally, a contract requires consideration—something of value exchanged between the parties. However, contracts executed as deeds do not require consideration to be valid.

Q3: What happens if a contract lacks legal capacity? A3: If a party lacks the legal capacity to contract (e.g., due to age, mental state), the contract can be invalidated or considered void.

Q4: Are oral contracts enforceable? A4: Yes, oral contracts can be enforceable, though proving the terms can be challenging. Certain types of contracts, however, must be in writing to be enforceable.

Q5: When is a contract considered illegal? A5: A contract is illegal if it involves activities or objects prohibited by law, such as fraud, crime, or immoral conduct.

Offer: A proposal by one party to another indicating a willingness to enter into a contract on certain terms.
Acceptance: The assent to the terms of an offer, forming a binding contract.
Consideration: Something of value exchanged between parties in a contract, which is essential for its enforceability.
Capacity: The legal ability of parties to enter into a contract, generally requiring that they are not minors, intoxicated, or mentally incapacitated.
Deed: A formal document that serves a special purpose, often requiring certain formalities that simple agreements don’t.
Lease: A contractual agreement by which one party conveys property to another for a specified term in return for periodic payments.
Hire-Purchase: A contract where goods are hired with an option to purchase at the end of the hire period, typically involving periodic payments.
Bill of Exchange: A written, unconditional order directing one party to pay a fixed sum to another party.
Promissory Note: A financial instrument containing a written promise by one party to pay another party a definite sum of money.
Breach of Contract: The violation of any terms or conditions in a contract without a lawful excuse.

Online Resources

Suggested Books for Further Studies

“Contracts: Cases and Commentaries” by John P. Dawson, William Burnett Harvey, Stanley D. Henderson
“Contract Law: An Introduction to the English Law of Contract for the Civil Lawyer” by John Cartwright
“Principles of Contract Law” by Richard Stone and James Devenney
“The Law of Contracts and the Uniform Commercial Code” by Pamela Tepper

Accounting Basics: “Contract” Fundamentals Quiz

### What is required for an agreement to be considered a legally binding contract? - [x] Offer and acceptance along with other criteria. - [ ] Mutual friendship. - [ ] Good intentions. - [ ] Both parties being competent at negotiation. > **Explanation:** A legally binding contract requires an offer, acceptance, intention to create legal relations, consideration (if not a deed), capacity to contract, compliance with legal requirements, and legality. ### What cannot serve as a consideration in a legally binding contract? - [ ] Money. - [ ] Services. - [x] Secret promises. - [ ] Goods. > **Explanation:** Secret promises or anything without actual value cannot serve as valid consideration. ### What term describes a contract which involves mutual agreement through conduct rather than written documentation? - [x] Implied contract - [ ] Unit contract - [ ] Declared contract - [ ] Fixed contract > **Explanation:** An implied contract arises from the conduct of the parties, indicating acceptance of certain terms. ### Which of these scenarios indicates a lack of capacity to contract? - [x] A minor entering into a financial agreement. - [ ] An adult signing a lease agreement. - [ ] A corporation entering into a services agreement. - [ ] Two businesses forming a partnership. > **Explanation:** Minors generally lack the legal capacity to enter into binding contracts unless specific exceptions apply. ### What is essential for a contract of selling land to be valid? - [ ] Verbal agreement. - [x] Written documentation. - [ ] Presence of a third party. - [ ] Inclusion of a gift clause. > **Explanation:** Contracts for the sale of land require written documentation to be considered valid in most legal jurisdictions. ### In contract law, what term is used to describe something of value exchanged between the parties? - [ ] Promise. - [ ] Clause. - [ ] Warrant. - [x] Consideration. > **Explanation:** Consideration is the term used for something of value that is exchanged between the contracting parties, which is a crucial element for a contract's enforceability. ### Which entity usually enforces contracts and resolves disputes? - [ ] Local Municipality. - [x] Courts of Law. - [ ] Federal Agencies. - [ ] Community Boards. > **Explanation:** Courts of law enforce contracts and resolve disputes related to contract agreements. ### If a contract involves illegal activities, what is its legal status? - [x] Void. - [ ] Voidable. - [ ] Valid. - [ ] Entitled to reform. > **Explanation:** A contract that involves illegal activities is considered void and unenforceable by law. ### What type of contract necessitates compliance with formal legal requirements? - [ ] Verbal contract. - [x] Written contract. - [ ] Informal agreement. - [ ] Social contract. > **Explanation:** Written contracts, especially those concerning significant transactions like land sales or hire-purchase, must meet prescribed legal formalities. ### What term describes the voluntary agreement to the proposals of an offer? - [x] Acceptance. - [ ] Consideration. - [ ] Negotiation. - [ ] Condition. > **Explanation:** Acceptance is the term describing when an offeree voluntarily agrees to the terms proposed in an offer, completing the formation of the contract.

Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!