Contracts are formed when there is an offer, acceptance of the offer by another party, and consideration. These are the most important principles of contract law, but it is a very diverse and rich area of law with other principles worth noting, such as the parol evidence rule, the Statute of Frauds, and promissory estoppel.
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A contract cannot exist without an offer. An offer is a written or spoken communication or promise to enter into a binding and enforceable agreement. Once an offer is received, the person to whom the offer is made can accept or reject the offer. Generally, the person making the offer can revoke, or take back, the offer before the offer is accepted.
Once an offer is made, the person to whom the offer is made has a power of acceptance. In most cases, an offer can be accepted by making a promise to the person who made the offer or by performing the action requested in the offer. For instance, if Steve promises to sell his computer to Sally for £48, Sally can accept the offer by promising to pay Steve £48 or by actually paying Steve the £48.
Consideration is necessary to form a binding contract that requires each party to receive a benefit and suffer a detriment because of the promise of the other party. In the above example, Steve gives up his computer (a detriment) in exchange for Sally's £48 (a benefit); and Sally gives up her £48 (a detriment) and receives Steve's computer (a benefit). Furthermore, Steve's promise to give his computer causes Sally to promise to give up her £48, and vice versa.
The Parol Evidence Rule
The parol evidence rule is an evidentiary principle that prevents external evidence that modifies or adds to a contract from being introduced in court for determining a breach of the contract, when that evidence occurred before or at the same time as the signing of the contract. There are some exceptions to the parol evidence rule: to show later agreements between the parties, to help interpret the terms in the contract, or to show fraud, mistake, duress, or lack of consideration.
The Statute of Frauds
The Statute of Frauds requires certain contracts to be in writing and is used as a defence by a person being sued to force the other party to prove the existence of the contract. The Statute of Frauds applies to land sale contracts, contracts made in anticipation of marriage, contracts to pay the debt of another person, contracts for a lease that lasts longer than one year, contracts for the sale of goods valued over £325, or contracts that cannot be completed within one year of its making; these must all be in writing.
Promissory estoppel is a principle of contract law that can cause a promise to be enforced even when consideration is lacking. If a person makes a promise to another person, and the second person does something or gives something up while relying on the promise, the person making the promise must perform. For instance, if Steve tells Sally that she can have his computer if she enroles in college, and she enroles in college, relying on the promise that he will give her the computer, Steve must give her the computer.
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