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When is a contract not a contract?

CeMAP paper one requires candidates to have knowledge and understanding of contract law. This article considers some general principles of contract law before moving on to look at some basic issues relating to agency. Contracts can be made in a number of ways – principally in writing and by deed. Some contracts can be made orally, although not all contracts can be made in this way. For example, agreements for the sale of land must be in writing, while conveyances of land must be by deed. However, all contracts are subject to certain basic requirements if they are to be binding upon the parties concerned. The five basic requirements can be summarised as follows: offer and acceptance; consideration; capacity to contract; intention to create a legal relationship; and legality of object.

First, there must be an offer by one party which must be communicated to the other party who accepts it. In England, the promise in the contract must be supported by consideration which is usually, but not necessarily, the payment of money. Each party to the contract must have the power to enter into the contract. Some parties have no power or only limited power to enter into a contract – for example, persons of unsound minds or minors. The parties must intend to create a legal relationship between them, rather than entering into an informal agreement or arrangement, such as a social or domestic arrangement which is not intended to be legally binding. Finally, it is not possible to make a contract for a purpose that is illegal, immoral or against public policy, such as an agreement to commit a criminal act.

Contracts can be invalidated in a number of ways. For instance, one of the parties may have entered into the contract as a result of duress, which is violence or the threat of violence, or through undue influence which is a more subtle form of pressure such as blackmail. There may be a false statement of fact, known as misrepresentation, made by one party to the other which could have encouraged the latter to enter into the contract. The effect of this would be to make the contract voidable at the option of the innocent party.

Generally, there is no duty of disclosure between the parties to a contract, although there are exceptions. One of the most notable of these relates to contracts of insurance which are subject to the principle of utmost good faith, whereby all material facts must be disclosed whether asked for or not. This duty of disclosure applies to both the proposer and the insurer. Non-disclosure makes the contract voidable at the option of the innocent party.

If a party fails to perform his side of the contract and does not have a legal reason for doing so, this would be regarded as a breach of contract. There are a number of remedies available, the main ones being the seeking of damages, an order for specific performance or an injunction. The most common course is to seek damages.

One other area of law that follows on from that of contract in CeMAP paper one is agency. An agent is a person who acts on behalf of another who is known as the principal. In law, the acts of the agent are treated as being those of the principal. Clearly, an agent should only act within the authority given to him by his principal. If an agent exceeds his power, it could result in the principal being liable on the contract. This could happen when, although the agent acts outside his authority, he acts within what is known as his &#39apparent authority&#39. Apparent authority is where something is done or said by the principal that gives the impression that he has authorised what the agent has done. Another possible outcome of an agent acting outside of his authority is that the agent himself could be made liable. This can act as a protection for the third party who is able to hold the agent personally responsible. Otherwise, it would be unfair to the third party who in good faith entered into a contract only to find himself without recourse to either the principal (if there is no apparent authority) or the agent. Finally, if the agent exceeds his authority, the principal can agree after the event to what the agent has done. This is known as ratification.

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