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Which of the following are always considered as minimum preconditions for a contract? Select TWO that apply:
In order to form a contract to come into being, there are five conditions:
- Offer
- Acceptance
- Consideration
- Intention to be legally bound
- Capacity to contract
LO 1, AC 1.2
In a sale contract, a clause requires the seller to "defend, reimburse, and hold harmless" the buyer and its personnel from and against any and all damages arising in connection with some specific circumstances. This clause is an example of...?
An indemnity is a promise by one party to compensate another for the loss suffered as a consequence of a specific event, called the ''trigger event''.
The trigger event can be anything defined by the parties, including:
- A breach of contract;
- A party's fault or negligence;
- A specific action.
An indemnity operates as a transfer of risks between the parties, and changes what they would otherwise be liable for or entitled to under a normal damage claim.
Force Majeure Provisions: A force majeure event refers to the occurrence of an event which is outside the reasonable control of a party and which prevents that party from performing its obligations under a contract.
Liquidated damages are presented in certain legal contracts as an estimate of otherwise intangible or hard-to-define losses to one of the parties. It is a provision that allows for the payment of a specified sum should one of the parties be in breach of contract.
LO 3, AC 3.2
Which of the following is the best definition of ''ultra vires''?
Ultra vires is a Latin phrase, meaning 'beyond the powers.' Describes actions taken by government bodies or corporations that exceed the scope of power given to them by laws or corporate charters. When referring to the acts of government bodies (e.g., legislatures), a constitution is most often the measuring stick of the proper scope of power.
LO 1, AC 1.2
Which of the following is an invitation to treat?
An invitation to treat is an action inviting other parties to make an offer to form a contract. These actions may sometimes appear to be offers themselves, and the difference can sometimes be difficult to determine. The distinction is important because accepting an offer creates a binding contract while 'accepting' an invitation to treat is actually making an offer.
One simple test to distinguish an offer and an invitation to treat is to ask what this statement will become when it is accepted. Now we apply this test to four options:
- Tender bid: Tender bid is submitted by a supplier to an invitation to tender from the buyer. It states the specific quantity, price and other elements. If buyer accepts the bid, there will be a contract between them. Therefore, a tender bid is an offer.
- Purchase order: Purchase order which is sent by a buyer will state the items, the quantity, the price and terms and conditions. If supplier accepts the purchase order, there will also be a contract between two parties. It is also an offer.
- Price list: Price list is prepared by a supplier. The price list often states the items and unit price. If a buyer accepts it, the contract has not yet been formed since the contract scope has not yet been decided. It is an invitation to treat.
- Invoice: Invoice is often sent after a contract is formed. It is in fact a request for payment, neither offer nor invitation to treat.
- CIPS study guide page 29-32
- What Is an Invitation to Treat?
LO 1, AC 1.1
According to rule of contract formation, which of the following is a valid acceptance?
Once a valid acceptance takes place, a binding contract is formed. It is therefore important to know what constitutes a valid acceptance in order to establish if the parties are bound by the agreement. There are three main rules relating to acceptance:
1. The acceptance must be communicated to the offeree.
2. The terms of the acceptance must exactly match the terms of the offer.
3. The agreement must be certain.
Among the answers:
'The person says that she will think about it overnight' does not match the terms of the offer. The offeree does not assure that she will accept the offer.
'The person asks for a lower price': This is a counter-offer.
'The person states that she is able to pay the offered price' is not certain. The offeree merely provides information on her financial ability.
- Contractual agreement - offer and acceptance
- CIPS study guide page 33-35
LO 1, AC 1.2
